Dirty dozen: Update on the UK GAAR
Reflecting on the publication of the first dozen opinions from the UK’s GAAR Advisory Panel, Donald Drysdale wonders what general conclusions can be drawn from them.
I wrote recently about ‘Spotlights’, in which HMRC publish information about tax avoidance arrangements that have come to their attention.
I suggested that practitioners should maintain an awareness of schemes which HMRC have identified as unacceptable, to help in advising clients who might otherwise be tempted to sail too close to the wind.
By contrast, this article explores a darker topic by updating you on HMRC’s attempts to combat avoidance arrangements which are judged to be ‘abusive’. These are circumstances which most practitioners will hope never to encounter.
The UK GAAR
The General Anti-Abuse Rule (GAAR) was introduced by the Finance Act 2013, and took effect from 17 July 2013. An independent GAAR Advisory Panel was established by the Commissioners of HMRC, with terms of reference updated in June 2018.
The Panel’s role is to approve HMRC’s GAAR guidance and provide opinions on cases where HMRC consider the GAAR may apply. Publications by the Panel, and the guidance it approves, are available online.
The Panel delivers reasoned opinions to HMRC and the taxpayer on cases referred to it by HMRC. A sub-panel of three Panel members considers each case and delivers its opinion – normally within 60 days of receiving all relevant material.
Under Finance Act 2013 s 207, arrangements are ‘tax arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that obtaining a tax advantage was a main purpose of the arrangements.
The legislation treats tax arrangements as ‘abusive’ if they fail a ‘double reasonableness’ test – i.e. if entering into them or carrying them out cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.
Opinions of the GAAR Panel
The sub-panel must answer a ‘single reasonableness’ question: is the arrangement a reasonable course of action? This distinguishes the Panel’s role from that of the courts and tribunals.
The Panel does not perform a judicial function. However, its opinions must be taken into account by the court or tribunal in determining any issue in connection with the GAAR and the relevant tax arrangements.
In most cases, an anonymised version of each opinion is published by HMRC. Exceptionally, publication may be withheld if it is not feasible to publish the opinion in a form that maintains taxpayer confidentiality.
The opinions are not binding on HMRC or the taxpayer, but either party may take action to counteract the tax advantages alleged to have arisen.
Opinions published to date
The first GAAR opinion was not issued until August 2017. Since then, the Panel’s output has accelerated and the number of opinions published has now reached a round dozen.
The following is a brief summary of the twelve opinions issued so far, listed by publication date with the most recent first. In each case, the sub-panel regarded the arrangements it examined as abusive.
- 20 May 2019: Shareholders (Mr A and Mr B) extracted value from a company using a second-hand bond, gilt options, additional contributions and 'cooling off rights'.
- 20 May 2019: A company rewarded an individual employee using a second-hand bond, gilt options, additional contributions and 'cooling off rights’.
- 22 February 2019: An individual (Mr X) tried to avoid tax on future income by claiming relief for film-related losses, splitting the sale of his LLP Capital Account (i.e. the benefit of his future drawings from an LLP) from the sale of his residual interest in the LLP.
- 7 November 2018: A company rewarded an employee (Mr B) using loans, receiving his services through a third party, with creditor rights transferred to Employer Financed Retirement Benefit Schemes (EFRBS). The arrangements had little commercial aim other than to reduce B’s tax liabilities.
- 7 November 2018: A company rewarded a contractor (Mr N) using loans, receiving his services through a third party, with creditor rights transferred to EFRBS. The Panel decided that a loan made directly to N by the EFRBS would have been taxed as earnings, so routing it through the third party was artificial and should be disregarded.
- 29 March and 18 July 2018: In two other cases, companies rewarded employees using multiple deeds of contribution, employee loan agreements and tripartite agreements to create what the Panel considered to be loans to the employees from EFRBS.
- 26 February 2018: In a case in which a British Virgin Islands company acted as an accommodation party, a company used tripartite arrangements to reward an employee by what the Panel considered to be a loan.
- 11 December 2017: In a case where the sole proprietor of a close company was indebted to the company, cash or the equivalent of cash was extracted from the company through the use of trusts and trust interests.
- 3 August and 11 December 2017: In three cases broadly similar to one another, companies rewarded employees by purchasing gold bullion and entering into various transactions involving Employee Benefit Trusts (EBTs). See Spotlight 30.
In each of the above cases, sub-panel members agreed unanimously that neither entering into the tax arrangements nor carrying them out was a reasonable course of action in relation to the relevant tax provisions.
The UK GAAR does not apply to wholly-devolved taxes, but Scotland and Wales have taken action to provide broadly similar protection.
In Scotland, the Revenue Scotland and Tax Powers Act 2014 includes a General Anti-Avoidance Rule (SGAAR) in respect of devolved taxes from 1 April 2015. It is designed to be wider than the UK GAAR, but has not yet been tested. There is no SGAAR Panel. Guidance on the SGAAR is available online.
Wales amended the Tax Collection and Management (Wales) Act 2016 from 1 April 2018 to introduce a General Anti-Avoidance Rule (WGAAR) for its devolved taxes. The Welsh Revenue Authority does not regard the Welsh GAAR as substantively wider than the UK GAAR. There is no WGAAR Panel. Guidance is available online.
Scottish income tax, the Welsh rates of income tax and (if implemented) the Northern Ireland rate of corporation tax are intrinsic parts of the UK tax regime, covered by the UK GAAR. Arrangements involving more than one tax, for example, a property transaction subject to corporation tax and land and buildings transaction tax, might fall within multiple GAARs.
The bottom line
The rulings to date by the UK GAAR Advisory Panel provide a salutary warning that it is not enough for tax planning to comply with the letter of the law. To be effective it must also respect the intention of Parliament.
Article supplied by Taxing Words Ltd