Next week’s Finance Bill will include the new general anti-abuse rule (GAAR) which is expected to come into effect in June or July 2013. It is perhaps a measure of the changing political climate over the past year that the GAAR, which was initially very controversial in some quarters, is now widely regarded as necessary and indeed somewhat overdue. The GAAR will apply to most UK taxes, income tax, capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax and the new annual residential property tax. It will not apply to stamp duty or SDRT, nor to VAT which is subject to European Directives and has its own abuse of law doctrine. The GAAR will be extended to apply to National Insurance contributions by separate legislation.
Draft legislation was published in December, accompanied by the first draft of the GAAR guidance notes which are vital to the understanding of the relatively short and conceptually unfamiliar GAAR legislation. The Budget announcement does not give details of any changes to the December 2012 drafts, so it is likely that the Finance Bill will be broadly consistent with the earlier draft which commences with the succinct operative provision: “This Part has effect for the purpose of counteracting tax advantages arising from tax arrangements that are abusive” and then goes on to attempt to define (with some difficulty) what is to be considered “abusive”. This is the crux of the matter. It is intended to be a test which restricts the operation of the GAAR to arrangements at the extreme and “egregious” end of the tax planning spectrum, so that the mere fact that a transaction is tax-driven will not cause it to fall foul of the GAAR.
The legislation preserves the criticised “double reasonableness” test but seeks to achieve a greater measure of certainty by specifying circumstances to be taken into account in determining what is or is not reasonable. Tax arrangements will be abusive if they are arrangements “the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances” including:
- whether the substantive results of the arrangements are consistent with any principles on which those provisions are based and the policy objectives,
- whether the means of achieving those results involves one or more contrived or abnormal steps, and
- whether the arrangements are intended to exploit any shortcomings in those provisions.
In particular, tax arrangements may be abusive if income, profits or gains are less, or deductions or losses are greater, for tax purposes than they are for economic purposes or if the arrangements result in a claim for repayment or crediting of tax which has not been paid and is unlikely to be paid.
Tax arrangements perceived to be abusive are to be counteracted by the making of adjustments (on a just and reasonable basis) to the tax in question or to any other tax to which the GAAR applies. Corresponding amendments can then be made to the tax liabilities of other persons, but only by way of tax relief or reduction.
However, HMRC must comply with specified procedural requirements before such counteraction can take effect. These involve the giving of notice to the tax payer who then has an opportunity to make representations, followed by referral to the GAAR Advisory Panel which will consider the arrangements and give one or more opinions (depending on whether the members of the panel have reached a consensus) as to whether the arrangements can reasonably be regarded as a reasonable course of action in relation to the relevant tax provision. The burden of proof is on HMRC which must show that there are abusive tax arrangements and that the counteraction is just and reasonable. HMRC, the courts and tribunals will not be obliged to follow the opinions of the Advisory Panel but must take them into account together with the published guidance. The Advisory Panel’s other function will be to revise and amend the guidance from time to time. It will not publish its opinions in full but will publish summaries of the principles underlying the decisions at periodic intervals.
The December 2012 version of the guidance is very helpful, particularly Part B which shows how the indicators of abusiveness would be applied in various situations, considering arrangements which would be counteracted by the GAAR (including some decided anti-avoidance cases) and also arrangements which would not be caught, such as use of non-QCB loan notes for deferred consideration on a share sale.