HMRC’s GAAR guidance, approved by the interim advisory panel, was published earlier this month. The key principles which can be derived from the guidance are as follows: (a) taxpayers are no longer free to use their ingenuity to reduce their tax bills by any lawful means; (b) taking the tax treatment into account as a commercial consideration is allowed; (c) in many circumstances, there are different courses of action that a taxpayer can quite properly choose between; (d) achieving results through contrived or abnormal steps will often be caught; (e) taxpayer choices which are abusive or exploit legislative shortcomings are not allowed; (f) if arrangements are consistent with the underlying policy and which accord with the spirit of the legislation, then the GAAR will not apply; (g) if arrangements accord with ‘established practice’ then the GAAR will not apply; (h) the GAAR will not apply to arrangements which fall within the terms of prescriptive legislation (if there is no contrivance); (i) some element of artificiality may not be caught; and (j) deriving benefit from the allocation of profits under international tax rules is not of itself abusive. For taxpayers with tax affairs which do not exactly correlate with the examples given in the guidance or with established HMRC practice, the central question as to whether any other given arrangement is ‘abusive’ such that the GAAR applies still remains not clear cut.
There is no point in analysing or debating further whether we need or should have a general anti-abuse rule (GAAR) or what it should look like – we are to have a GAAR and it will almost definitely be in the form set out in the Finance Bill published at the end of March (FB 2013).
The key questions to now consider are:
The publication of HMRC’s GAAR guidance (‘the guidance’), approved by the interim advisory panel with effect from 15 April 2013, was therefore eagerly anticipated. In this article, we attempt to answer these key questions by considering the extent to which the guidance is likely to be of real practical use to taxpayers and their advisers.
The guidance has five parts. Parts A to C (the main guidance) and Part D (the worked examples) run to 171 pages in total and are the focus of this article. Part E deals with procedure. There are 41 worked examples in Part D. In addition, there are around 25 or so references to specific scenarios in the main body of the guidance. The key question becomes how much guidance and therefore certainty (and clarity) can be gleaned from the principles and examples set out in the guidance where a taxpayer is proposing to do something which is not referred to specifically?
We set out below a summary of the key principles we can discern from the guidance, focusing on the ‘double reasonableness test’, which the guidance refers to as ‘the crux of the GAAR test’.
The guidance sets out the fundamental approach of the GAAR, stating that the GAAR ‘rejects the approach taken by the courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means’ (para B2.1 of the guidance).
Several examples given in the guidance support the principle that ‘abusive use’ of what would otherwise be lawful transactions will now not work, including:
The guidance provides that it is reasonable to take the tax consequences of a transaction into account. It gives the following examples:
The guidance also confirms that the mere fact that tax advice has been obtained will not, of itself, be considered to be evidence of the fact that the taxpayer’s adopted course is motivated by tax savings and that he is entitled to take the potential tax consequences of his proposals into account (C3.7).
The guidance recognises that under the UK’s detailed tax rules, taxpayers frequently have a choice as to the way in which transactions can be carried out, and that differing tax results arise depending on the choice that is made (B4.2 and B11.1). The GAAR does not seek to challenge such choices unless they are considered ‘abusive’.
Later on, the guidance says that the GAAR test recognises that some parts of the tax legislation reflect a clear policy of providing tax relief or other specified outcomes for certain courses of action. It states that ‘reasonable steps taken to achieve the outcomes envisaged by those rules, or to prevent benefits under those rules from being inappropriately denied, will be a reasonable course of action in relation to those rules’ (C5.6.2).
The following scenarios – all of which are stated to fall outside the GAAR, on the basis that they accord with what parliament intended and are envisaged by the legislation – illustrate this principle:
However, the following scenarios are set out in the guidance as cases where the GAAR may be applied (because they do not represent what the guidance considers to be a ‘reasonable course of action’ in the circumstances):
Adopting features to fall within or outside a specific piece of legislation is problematic. The example given is temporarily seeking to fall outside the tax group rules by transferring 26% of shares in a particular company to some unconnected company or temporarily transferring property to a foreign nominee (C5.8.1). The guidance also provides that circular cash flows will be treated as constituting contrived or abnormal steps and therefore be ‘abusive’ (D5.5.2 and D5.6.1).
The GAAR will look to effectively restructure arrangements carried out with a commercial purpose but which use contrived or ‘abusive’ planning techniques to reach the same commercial outcome (C6.3.5).
The guidance also states that the GAAR is intended to ‘bring to an end, so far as possible, to the game of legislative catch-up and to make sure that “keep off the grass” warnings are heeded’ (D2.7). To this end, the examples given in the guidance as falling on the wrong side of the GAAR line include:
Examples of transactions which do not accord with the spirit of the legislation according to the guidance are as follows:
The approach in the GAAR represents a fundamental shift in approach from the House of Lords decision of Pepper v Hart [1992] UKHL 3. It will be necessary to determine the policy objectives of the relevant tax provisions in order to apply the GAAR. For the purposes of determining the underlying purpose of legislation, the guidance provides that reference may be made to, by way of example, consultation documents (D5.5.1) and Committee Stage debates (D8.5.3).
Where the tax arrangements accord with ‘established practice’ and HMRC had accepted such practice at the time that the arrangements are entered into, this indicates that such arrangements are not abusive (FB 2013 cl 204(5)).
The guidance lists the following ‘simple’ scenarios as being illustrative of this principle (D2.3.2):
It is worth noting that the guidance expressly provides that the above discussion is not a failsafe against the GAAR applying – if elements of these arrangements are brought together in a way that is ‘abusive’ or contrived – the GAAR will be applied notwithstanding the above.
The guidance provides that: ‘if the statute specifies a particular set of conditions quite precisely, then taxpayers are entitled to assume that they are on the right side of the line if they have satisfied the statutory condition and there is no contrivance about what they have done’ (D2.4.1). To this end, the examples given by the guidance include the following (D2.4.1):
However, there is a caveat: this principle does not apply to the extent that there is any ‘contrivance’ (D2.4.1). To this end, D15 expressly includes the example in Mayes v HMRC [2011] EWCA Civ 407 as one where the GAAR would apply.
The guidance provides that standard tax planning combined with some element of artificiality may not be ‘abusive’ (D2.5).
The examples given to illustrate this point include:
The mere fact that the arrangements of a multinational enterprise benefit from the rules set out in international tax treaties dealing with the allocation of profits to different states is not abusive (i.e. the GAAR is not a tool that could be used to increase the UK taxable profits properly attributable under international transfer pricing rules).
That said, D12 sets out an example which falls within the GAAR. The example, based on the facts of R (on the application of Huitson) v HMRC [2011] EWCA Civ 893, establishes that a wholly artificial scheme seeking to rely on the terms of the double tax treaty, in a way that was not intended by either party to the double tax treaty, is considered to be ‘abusive’.
Clearly, if a taxpayer is thinking of doing something identical or almost identical to any the 41 actual worked examples or the 25 or so other specific scenarios set out in the guidance, then the taxpayer and their advisers can be certain as to how HMRC will seek to apply the GAAR. The principles set out in the guidance are helpful and set out a framework for advisers to use when analysing other proposed transactions. But the central question as to whether arrangements are ‘abusive’ is still not clear cut, especially in the case of a new transaction where there is no established practice. We therefore suspect it will still leave advisers in many cases often struggling to give the definitive opinions that clients will be seeking.
By Simon Wilks
As the introduction of the GAAR draws closer, more people are thinking about how the GAAR will operate in practice. It was always going to be difficult to achieve a process that is rigorous without being cumbersome. The procedures outlined in the GAAR guidance set out a system of checks and balances. Here are the main steps.
An item in a tax return can be challenged under technical non-GAAR provisions and/or the GAAR provisions. If arrangements appear to be blatantly abusive, the GAAR will probably be invoked without determining whether the arrangements would fail on other grounds. The issue will then be considered by HMRC’s anti-avoidance group and by senior officers in the relevant business area, ensuring a consistency in HMRC’s approach, before a recommendation that a formal GAAR challenge should be made.
HMRC must then follow the requirements set out in the procedural schedule, which are designed to be a safeguard for the taxpayer. There will be a senior officer of HMRC who is responsible for the GAAR (‘the designated officer’) and who will give the taxpayer a written notice informing him that the GAAR is to be invoked. The notice will outline the tax arrangements in question, and will explain why it is believed that a tax advantage arises from abusive arrangements, as well as an explanation of the advisory panel process and the time limits. The taxpayer then has 45 days from the date on which the notice is given to make written representations in response to the designated officer. The 45 day period may be extended if the taxpayer makes a request in writing. If no representations are made or, if following consideration of the representations, HMRC believes the GAAR still applies, the matter must be referred to the advisory panel. There is no time limit governing this referral, but the designated officer will aim for a 45 day period from receiving the representations.
When the matter is referred to the panel, HMRC must provide the notice sent previously to the taxpayer, as well as any representations received and HMRC’s comments on those. At the same time, the taxpayer must be sent a notice confirming that the referral has been made and a copy of HMRC’s comments has been provided to the panel, as well as informing the taxpayer that further representations may be made to the panel. This transparency – which continues throughout the subsequent procedures – is important and should help ensure no undue advantage to either party.
Taxpayers have 21 days from the date on which the notice is given to make representations to the panel. It is positive that this period has been extended from the 14 days in the original draft of the legislation, although there are no time limits imposed on HMRC. Three weeks is a more realistic time frame for taxpayers – and this period can be extended further by the panel following a written request.
The advisory panel chairman must convene a panel of three members to consider the matter, which will then produce an opinion giving the joint opinion of the panel or more than one opinion where the members disagree. This will be given to both HMRC and the taxpayer. The opinion does not bind HMRC, but if HMRC chooses to disregard the opinion, it must be taken into account in any subsequent hearing in a court or tribunal. HMRC will then inform the taxpayer in writing whether the tax arrangement has been caught by the GAAR. If so, the notice will state what adjustments are required and a counteraction (which can be appealed through the courts) will follow. Given the issues at stake, the procedures will help to allay fears that the GAAR might be invoked on a whim and ensure the process is open and that taxpayers have time to put their case forward. Clearly though, the proof will be in how the process actually works in practice.
