The first ruling of the GAAR panel was published on 18 July 2017. The panel unanimously decided that a complex scheme involving EBTs and gold bullion was not a reasonable course of action, and so ruled in favour of HMRC. HMRC will want to establish a track record of success in front of the GAAR panel, so it is likely to make future GAAR referrals in relation to ‘mass-marketed’ schemes by the ‘boutique’ end of the market, rather than risk defeat over large corporate transactions.
Many years ago, schemes involving payment in gold bullion or platinum sponge were commonly used in an attempt to avoid NICs charges. One by one, the schemes were shut down, and in December 2004 the paymaster-general, Dawn Primarolo, said that if necessary, the government would introduce retrospective legislation to shut down future schemes. Announcing the crackdown, she said: ‘Experience has taught us that we are not always able to anticipate the ingenuity and inventiveness of the avoidance industry. Our objective is clear and the time has come to close this activity down permanently.’
Over 13 years later, the GAAR panel decided that a scheme involving gold bullion as well as an employee benefit trust (EBT) was not a ‘reasonable course of action’ in relation to the relevant legislation, and so issued its first ruling in favour of HMRC. Whilst the taxpayers may still decide to pursue the case in the courts, they may well be better-advised to concede at this stage.
What is perhaps surprising is not that the GAAR panel ruled against the scheme, but that such schemes were still being sold as late as 2015. Although the GAAR panel ruling is anonymised, the facts look remarkably similar to those set out in the case of Doran Bros (London) Ltd v HMRC [2017] UKFTT 0829. This case concerned the recovery of VAT on professional fees which the tribunal said ‘related to minimising the tax and NICs which was payable by the appellant if it chose to reward Mr Doran’ and related to a gold bullion and EBT tax planning scheme implemented by Qubic Tax.
The outline of the planning, as summarised by the GAAR panel, was that a company wished to ‘reward and incentivise’ its key employees. It sought advice on how to structure this reward so that it would not constitute remuneration for tax purposes. The company funded the purchase of gold for the employees, which was immediately sold. The employees settled the liability to the third-party gold supplier in return for a director’s loan account credit. An EBT was set up, under which the employees had an obligation to pay an amount equal to the purchase price of the gold.
As the GAAR panel pointed out, the economic effect would have been the same if the company had funded the EBT and the EBT had made a loan to the employees. In that case, there would clearly have been a charge to income tax under Part 7A of ITEPA 2003 (or alternatively, following the recent Supreme Court decision in the Rangers case ([2017] STC 1556), it might simply have been treated as earnings on general principles).
The scheme relied on a highly technical reading of Part 7A, and particularly a difference in drafting between s 554Z8(5) and s 554Z8(1). The latter subsection, but not the former, had an express requirement that there be ‘no connection with a tax avoidance arrangement’. The GAAR panel was firmly of the view that this was a scheme designed to exploit a ‘shortcoming in complex anti-avoidance legislation’. As its ruling says: ‘It should not come as a surprise that we conclude the steps taken are not a reasonable course of action’.
The question then arises as to whether the GAAR panel really needed to be troubled with a scheme which the courts would almost certainly have struck down in any case. HMRC was well aware of the scheme, and had indicated (in its avoidance Spotlight 30, published on 6 May 2016) that it did not consider it would succeed. However, a key benefit of the GAAR panel process is that it can give a clear ‘keep off the grass’ warning much faster than a case can reach final decision status through the courts. HMRC recently published its list of avoidance decisions for 2016/17, and it is notable that almost all of the cases involve transactions which took place over ten years ago. Using the GAAR route is likely to enable HMRC to close down ‘mass-marketed’ schemes more quickly, and at lower cost, than taking them through the courts.
The GAAR was introduced in 2013 and only applies to transactions implemented on or after 17 July 2013. Since a transaction undertaken in 2013/14 would have been included in a return filed by 31 January 2015, and HMRC would then have had a further year to open an enquiry, it is only to be expected that it has taken until 2017 for the GAAR panel to start issuing rulings. It will be interesting to see whether this first ruling is followed by a trickle, or even a flood, of other decisions, and particularly to see whether the panel may rule against HMRC in a future case. In relation to large corporate transactions, my experience is that most large companies are not undertaking planning which comes anywhere close to the GAAR, so HMRC may still prefer to challenge bespoke planning in the courts, particularly as the cost/benefit calculation of challenging a single large taxpayer is more favourable for HMRC than coordinating a number of smaller disputes with individual taxpayers.
The introduction of new penalties for enablers of defeated tax avoidance (removed from the pre-election bill, but expected in this year’s second Finance Bill) is likely to increase the number of referrals to the GAAR panel. A penalty cannot be imposed on an ‘enabler’ after the arrangements are defeated in the courts unless the scheme itself was considered by the panel or HMRC has referred to the panel the question of whether a penalty should be imposed on an enabler.
In my view, we will see a number of further rulings relating to the ‘boutique’ end of the market, with HMRC being keen to establish a track record of success in front of the GAAR panel. It is less likely that it will be willing to risk defeat in relation to large corporate transactions, where a GAAR panel ruling that tax planning is ‘a reasonable course of action’ would be a significant setback in HMRC’s long-running crusade to stamp out tax avoidance.
The first ruling of the GAAR panel was published on 18 July 2017. The panel unanimously decided that a complex scheme involving EBTs and gold bullion was not a reasonable course of action, and so ruled in favour of HMRC. HMRC will want to establish a track record of success in front of the GAAR panel, so it is likely to make future GAAR referrals in relation to ‘mass-marketed’ schemes by the ‘boutique’ end of the market, rather than risk defeat over large corporate transactions.
Many years ago, schemes involving payment in gold bullion or platinum sponge were commonly used in an attempt to avoid NICs charges. One by one, the schemes were shut down, and in December 2004 the paymaster-general, Dawn Primarolo, said that if necessary, the government would introduce retrospective legislation to shut down future schemes. Announcing the crackdown, she said: ‘Experience has taught us that we are not always able to anticipate the ingenuity and inventiveness of the avoidance industry. Our objective is clear and the time has come to close this activity down permanently.’
Over 13 years later, the GAAR panel decided that a scheme involving gold bullion as well as an employee benefit trust (EBT) was not a ‘reasonable course of action’ in relation to the relevant legislation, and so issued its first ruling in favour of HMRC. Whilst the taxpayers may still decide to pursue the case in the courts, they may well be better-advised to concede at this stage.
What is perhaps surprising is not that the GAAR panel ruled against the scheme, but that such schemes were still being sold as late as 2015. Although the GAAR panel ruling is anonymised, the facts look remarkably similar to those set out in the case of Doran Bros (London) Ltd v HMRC [2017] UKFTT 0829. This case concerned the recovery of VAT on professional fees which the tribunal said ‘related to minimising the tax and NICs which was payable by the appellant if it chose to reward Mr Doran’ and related to a gold bullion and EBT tax planning scheme implemented by Qubic Tax.
The outline of the planning, as summarised by the GAAR panel, was that a company wished to ‘reward and incentivise’ its key employees. It sought advice on how to structure this reward so that it would not constitute remuneration for tax purposes. The company funded the purchase of gold for the employees, which was immediately sold. The employees settled the liability to the third-party gold supplier in return for a director’s loan account credit. An EBT was set up, under which the employees had an obligation to pay an amount equal to the purchase price of the gold.
As the GAAR panel pointed out, the economic effect would have been the same if the company had funded the EBT and the EBT had made a loan to the employees. In that case, there would clearly have been a charge to income tax under Part 7A of ITEPA 2003 (or alternatively, following the recent Supreme Court decision in the Rangers case ([2017] STC 1556), it might simply have been treated as earnings on general principles).
The scheme relied on a highly technical reading of Part 7A, and particularly a difference in drafting between s 554Z8(5) and s 554Z8(1). The latter subsection, but not the former, had an express requirement that there be ‘no connection with a tax avoidance arrangement’. The GAAR panel was firmly of the view that this was a scheme designed to exploit a ‘shortcoming in complex anti-avoidance legislation’. As its ruling says: ‘It should not come as a surprise that we conclude the steps taken are not a reasonable course of action’.
The question then arises as to whether the GAAR panel really needed to be troubled with a scheme which the courts would almost certainly have struck down in any case. HMRC was well aware of the scheme, and had indicated (in its avoidance Spotlight 30, published on 6 May 2016) that it did not consider it would succeed. However, a key benefit of the GAAR panel process is that it can give a clear ‘keep off the grass’ warning much faster than a case can reach final decision status through the courts. HMRC recently published its list of avoidance decisions for 2016/17, and it is notable that almost all of the cases involve transactions which took place over ten years ago. Using the GAAR route is likely to enable HMRC to close down ‘mass-marketed’ schemes more quickly, and at lower cost, than taking them through the courts.
The GAAR was introduced in 2013 and only applies to transactions implemented on or after 17 July 2013. Since a transaction undertaken in 2013/14 would have been included in a return filed by 31 January 2015, and HMRC would then have had a further year to open an enquiry, it is only to be expected that it has taken until 2017 for the GAAR panel to start issuing rulings. It will be interesting to see whether this first ruling is followed by a trickle, or even a flood, of other decisions, and particularly to see whether the panel may rule against HMRC in a future case. In relation to large corporate transactions, my experience is that most large companies are not undertaking planning which comes anywhere close to the GAAR, so HMRC may still prefer to challenge bespoke planning in the courts, particularly as the cost/benefit calculation of challenging a single large taxpayer is more favourable for HMRC than coordinating a number of smaller disputes with individual taxpayers.
The introduction of new penalties for enablers of defeated tax avoidance (removed from the pre-election bill, but expected in this year’s second Finance Bill) is likely to increase the number of referrals to the GAAR panel. A penalty cannot be imposed on an ‘enabler’ after the arrangements are defeated in the courts unless the scheme itself was considered by the panel or HMRC has referred to the panel the question of whether a penalty should be imposed on an enabler.
In my view, we will see a number of further rulings relating to the ‘boutique’ end of the market, with HMRC being keen to establish a track record of success in front of the GAAR panel. It is less likely that it will be willing to risk defeat in relation to large corporate transactions, where a GAAR panel ruling that tax planning is ‘a reasonable course of action’ would be a significant setback in HMRC’s long-running crusade to stamp out tax avoidance.
