Contractors' Questions: What's in the General Anti-Abuse Rule?
Contractor’s Question: Although it is not aimed at contractors, is there anything in the General Anti-Abuse Rule which limited company owners or taxpayers more generally need to be aware of? The guidance is too complicated for me to read entirely so I would just like to know - what are the GAAR’s broadest aims or implications?
Expert’s Answer: HM Revenue & Customs has indeed published the GAAR guidance which has been approved by the GAAR Advisory Panel and which must be taken into account by any court or tribunal which is considering the application of the GAAR. So the guidance has quasi-judicial authority.
The guidance is a very lucid explanation setting out what the GAAR is designed to achieve and it should help ensure that the rule works as intended and helps to reduce the incidence of “abusive” tax avoidance arrangements.
In broad terms, the guidance states that no longer is “taxation to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability”.
So the GAAR will apply to abusive tax arrangements. ‘Tax arrangement’ is drawn quite widely to cover instances when “it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.”
The guidance recognises that this sets a low threshold but the main test, or filter, is whether the tax arrangement is abusive and nearly a third of the principal guidance is taken up in explaining what is meant by 'abusive.'
According to paragraph C5.4, the key elements of the abusive tax arrangements which are arrangements which cannot reasonably be regarded as:
- a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances;
and these circumstances require you (or your advisor/accountant) to:
- Compare the substantive results of the arrangements with the principles on which the relevant tax provisions are based, and with the policy objectives of those provisions;
- See whether there are contrived or abnormal steps; and
- See whether the arrangements are intended to exploit any shortcomings in the relevant provisions; and
There are then certain indicators of abusive tax arrangements such as less taxable profit than the economic profit or greater losses. On the other hand an indicator of non-abusive tax arrangements is where the arrangements accord with established practice and HMRC at the time that the arrangements were entered into had indicated that they accepted the particular practice.
Lastly, it is helpful that the guidance specifically recognises (at paragraph B12.2) that there are sometimes bear traps in the legislation and taxpayers “have to take what appear to be contrived steps in order to ensure that they are not taxed on more than the economic gain” in which case such steps would generally not be considered to be abusive.
The Expert’s Answer is based on the comments of the Institute of Chartered Accountants in England and Wales and Francesca Lagerberg, ex-chair of the ICAEW’s Tax Faculty.