GAAR may apply to ‘abusive’ arrangements exploiting double tax treaty provisions, or the way those provisions interact with others
HMRC guidance released today provides ‘in layperson’s language’ a broad summary of what the general anti-abuse rule (GAAR) is designed to achieve.
PwC tax partner Alex Henderson noted that the guidance highlights the aim to ‘end extreme avoidance, not the centre ground of tax planning’.
The fundamental premise underlying the GAAR, according to the guidance approved by the GAAR interim advisory panel, is that ‘the levying of tax is the principal mechanism by which the state pays for the services and facilities that it provides for its citizens, and that all taxpayers should pay their fair contribution’.
The approach taken by the courts in a number of older cases – ‘that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position’ – is rejected, the guidance says.
‘Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability.’
Parliament has ‘imposed an overriding statutory limit’ on how far taxpayers can go to reduce their tax bill: ‘That limit is reached when the arrangements put in place by the taxpayer to achieve that purpose go beyond anything which could reasonably be regarded as a reasonable course of action.’
The target
The primary policy objective, the guidance says, is to deter taxpayers from entering into abusive arrangements, and to deter would-be promoters from promoting such arrangements.
‘There may be tax avoidance arrangements that are challenged by HMRC using other parts of the tax code, but if they are not abusive they are not within the scope of the GAAR.
‘If a taxpayer is undeterred, and goes ahead with an abusive arrangement, then the GAAR operates so as to counteract the abusive tax advantage which he or she is trying to achieve. The counteraction that the GAAR permits will be a tax adjustment which is just and reasonable in all the circumstances.’
Actions outside the ‘target area’
There are, however, many situations where the tax code enables a taxpayer to choose ‘quite properly’ between different courses of action. HMRC says: ‘The GAAR is carefully constructed to include a number of safeguards that ensure that any reasonable choice of a course of action is kept outside the target area of the GAAR.’
For example, a decision to incorporate a business, or use EIS reliefs or capital allowances ‘in a straightforward way’ would be outside the scope of the GAAR. But contrived arrangements to obtain a relief may be caught.
International tax arrangements
‘Abusive’ arrangements aimed at exploiting double tax treaty provisions – or the way those provisions interact with other provisions of UK tax law – may be caught, according to the guidance.
HMRC also refers to the current OECD project on possible measures to tackle ‘erosion of the tax base’ and profit shifting, which may affect the tax treatment of multinationals.
But the guidance makes it clear that the GAAR cannot apply to arrangements that are not ‘abusive’ but benefit from rules governing the allocation of profit among the companies in a group, or the allocation of taxing rights between countries.
The guidance says: ‘There is a network of treaties between states setting out rules that govern the taxation of investment and business activities involving more than one state. These treaties (which are typically based on an OECD model treaty) are usually referred to as “double tax treaties”, and their purpose is to avoid subjecting such investments or activities to tax in more than one state and to prevent tax evasion. The UK has entered into over 100 such treaties, and they are given effect in domestic tax law.
‘Many of the established rules of international taxation are set out in double taxation treaties. These cover, for example, the attribution of profits to branches or between group companies of multi-national enterprises, and the allocation of taxing rights to the different states where such enterprises operate. The mere fact that arrangements benefit from these rules does not mean that the arrangements amount to abuse, and so the GAAR cannot be applied to them. Accordingly, many cases of the sort which have generated a great deal of media and parliamentary debate in the months leading up to the enactment of the GAAR cannot be dealt with by the GAAR.’
It adds: ‘However, where there are abusive arrangements which try to exploit particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of UK tax law, then the GAAR can be applied to counteract the abusive arrangements.’
Alex Henderson, tax partner at PwC, said: ‘Today's guidance highlights the GAAR aims to end extreme avoidance, not the centre ground of tax planning. There are clear examples of what the GAAR won't cover, such as reliefs to support business activity and investment. This will help reassure tax payers and prevent business being gummed up by uncertainty. The guidance is also important for managing expectations – ordinary international tax arrangements are outside the GAAR's scope.’
GAAR may apply to ‘abusive’ arrangements exploiting double tax treaty provisions, or the way those provisions interact with others
HMRC guidance released today provides ‘in layperson’s language’ a broad summary of what the general anti-abuse rule (GAAR) is designed to achieve.
PwC tax partner Alex Henderson noted that the guidance highlights the aim to ‘end extreme avoidance, not the centre ground of tax planning’.
The fundamental premise underlying the GAAR, according to the guidance approved by the GAAR interim advisory panel, is that ‘the levying of tax is the principal mechanism by which the state pays for the services and facilities that it provides for its citizens, and that all taxpayers should pay their fair contribution’.
The approach taken by the courts in a number of older cases – ‘that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position’ – is rejected, the guidance says.
‘Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability.’
Parliament has ‘imposed an overriding statutory limit’ on how far taxpayers can go to reduce their tax bill: ‘That limit is reached when the arrangements put in place by the taxpayer to achieve that purpose go beyond anything which could reasonably be regarded as a reasonable course of action.’
The target
The primary policy objective, the guidance says, is to deter taxpayers from entering into abusive arrangements, and to deter would-be promoters from promoting such arrangements.
‘There may be tax avoidance arrangements that are challenged by HMRC using other parts of the tax code, but if they are not abusive they are not within the scope of the GAAR.
‘If a taxpayer is undeterred, and goes ahead with an abusive arrangement, then the GAAR operates so as to counteract the abusive tax advantage which he or she is trying to achieve. The counteraction that the GAAR permits will be a tax adjustment which is just and reasonable in all the circumstances.’
Actions outside the ‘target area’
There are, however, many situations where the tax code enables a taxpayer to choose ‘quite properly’ between different courses of action. HMRC says: ‘The GAAR is carefully constructed to include a number of safeguards that ensure that any reasonable choice of a course of action is kept outside the target area of the GAAR.’
For example, a decision to incorporate a business, or use EIS reliefs or capital allowances ‘in a straightforward way’ would be outside the scope of the GAAR. But contrived arrangements to obtain a relief may be caught.
International tax arrangements
‘Abusive’ arrangements aimed at exploiting double tax treaty provisions – or the way those provisions interact with other provisions of UK tax law – may be caught, according to the guidance.
HMRC also refers to the current OECD project on possible measures to tackle ‘erosion of the tax base’ and profit shifting, which may affect the tax treatment of multinationals.
But the guidance makes it clear that the GAAR cannot apply to arrangements that are not ‘abusive’ but benefit from rules governing the allocation of profit among the companies in a group, or the allocation of taxing rights between countries.
The guidance says: ‘There is a network of treaties between states setting out rules that govern the taxation of investment and business activities involving more than one state. These treaties (which are typically based on an OECD model treaty) are usually referred to as “double tax treaties”, and their purpose is to avoid subjecting such investments or activities to tax in more than one state and to prevent tax evasion. The UK has entered into over 100 such treaties, and they are given effect in domestic tax law.
‘Many of the established rules of international taxation are set out in double taxation treaties. These cover, for example, the attribution of profits to branches or between group companies of multi-national enterprises, and the allocation of taxing rights to the different states where such enterprises operate. The mere fact that arrangements benefit from these rules does not mean that the arrangements amount to abuse, and so the GAAR cannot be applied to them. Accordingly, many cases of the sort which have generated a great deal of media and parliamentary debate in the months leading up to the enactment of the GAAR cannot be dealt with by the GAAR.’
It adds: ‘However, where there are abusive arrangements which try to exploit particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of UK tax law, then the GAAR can be applied to counteract the abusive arrangements.’
Alex Henderson, tax partner at PwC, said: ‘Today's guidance highlights the GAAR aims to end extreme avoidance, not the centre ground of tax planning. There are clear examples of what the GAAR won't cover, such as reliefs to support business activity and investment. This will help reassure tax payers and prevent business being gummed up by uncertainty. The guidance is also important for managing expectations – ordinary international tax arrangements are outside the GAAR's scope.’
