First GAAR Advisory Panel Opinion issued
Ever since the GAAR was introduced in 2013 advisers have been waiting to see an opinion from the GAAR Advisory Panel. Susan Cattell looks at the first opinion to be issued.
Before HMRC can use the GAAR to counteract the tax advantage which a taxpayer hopes to obtain from using a tax avoidance scheme it must refer the case to the GAAR Advisory Panel. This was one of the safeguards for taxpayers, included in the GAAR legislation in 2013.
The GAAR only applies to abusive tax avoidance arrangements (applying the ‘double reasonableness’ test in the GAAR legislation). HMRC must obtain the opinion of the GAAR advisory panel, as to whether an arrangement constituted a reasonable course of action, before it can apply the GAAR.
For most of the taxes to which it applies, GAAR took effect for arrangements entered into on or after 17 July 2013. This partly explains why the first panel opinion has only just been issued; it takes time for a return to be filed and for HMRC to make the necessary enquiries. There has also been a significant reduction in abusive schemes following the introduction of the GAAR and other anti-avoidance measures. However, there have been suggestions that HMRC should have made use of the GAAR sooner, not least to reinforce its deterrent effect.
The case before the GAAR Advisory Panel
The case involved a company and its two directors, Mr X (51% shareholder) and Mrs Y (49% shareholder). The company wished to reward its key employees, Mr X and Mrs Y, in a way which avoided the payment of taxable remuneration. The scheme involved the purchase of gold by the company and transactions using an employee benefit trust (EBT). According to the company, the result of the scheme was that the two directors were not taxable on approximately £150,000 each and the company was entitled to an immediate deduction of approximately £300,000 in computing its taxable profits.
HMRC regularly warns taxpayers, via its ‘Spotlight’ notices, about avoidance schemes it will challenge. Spotlight 30 issued in May 2016 dealt with ‘Gold Bullion Schemes’ which “seek to disguise remuneration to individuals through paying them via a series of transactions buying and selling an asset, commonly gold bullion.”
HMRC stated its belief that these schemes did not work and that it would challenge them, wherever possible, including legal action through the courts. It is not therefore surprising that HMRC decided to challenge the scheme involving Mr X and Mrs Y.
The nature of the challenge might at first appear surprising because the GAAR is primarily designed to tackle abusive arrangements which would otherwise succeed, as set out in the GAAR guidance. It has been suggested that HMRC could have challenged the scheme successfully in other ways; the recent Supreme Court decision in the Rangers case perhaps confirms this view.
HMRC may, however, have felt that there was a small risk that the scheme could succeed. The Spotlight notes that whilst HMRC did not consider that the schemes worked, to put the matter beyond doubt, amendments to the disguised remuneration legislation were being made by Finance Act 2016.
Alternatively, HMRC may simply have believed that this case merited the use of the GAAR regardless of other potential options, as set out in the GAAR guidance: “there may be some arrangements which appear to be so clearly abusive that it would be appropriate for HMRC to invoke the GAAR without first determining whether the arrangements would achieve their intended tax result under the rest of the tax rules.” On the facts revealed by the panel opinion it would be hard to disagree.
The GAAR Advisory Panel is independent of HMRC; its two main functions are to approve the HMRC GAAR guidance and to provide opinions on cases referred to it by HMRC, where HMRC wishes to invoke the GAAR. In most cases anonymised versions of the opinions will be published shortly after the opinion is given; the panel members who considered the case are not named in published opinions.
On this occasion the panel actually issued three opinions because HMRC had made three referrals relating to the company, Mr X and Mrs Y. In each case the opinion of the panel was that:
“The entering into of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions; and the carrying out of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions.”
In reaching its conclusions the panel, in line with the legislation setting out the ‘double reasonableness’ test, considered whether the arrangements included contrived and abnormal steps. It concluded that it was abnormal to reward employees using gold. It could see no reason for the steps to involve gold, other than for tax purposes. If cash had been used instead, neither the directors nor the company would have been in a substantially different economic or commercial position (other than saving the fees in relation to buying and selling the gold). The panel also concluded that whilst it is not abnormal for an employer to use an EBT, the way in which the EBT was used in this case was abnormal.
It also considered the principles and policy objectives of the relevant legislation in s62 and Part 7A ITEPA 2003 and whether the arrangements were intended to exploit any shortcomings in the legislation. It concluded that the overall policy objective was clear: “employment rewards (including loans from employee benefit trusts) are to be taxed on the sum of money available to the employee.” There were shortcomings in the legislation which the steps taken were intended to exploit. It went on to decide that this was a clear case of “associated taxpayers seeking to frustrate the intent of Parliament by identifying potential loopholes in complex interlinking anti-avoidance legislation, and arranging a series of intricate and precise steps to exploit those loopholes so as to gain an unexpected and unintended tax “win”.
HMRC said in a statement that it was ‘delighted’ with the first opinion of the GAAR panel which it regards as having ‘wide-reaching impacts’ and reinforcing ‘the power of the GAAR in tackling abusive tax avoidance’. It no doubt hopes that other users of the gold bullion schemes described in Spotlight 30 will now concede that the schemes do not work and agree to settle. Beyond that the publicity should be helpful in deterring other taxpayers from adopting the type of schemes covered by Spotlights.
Advisers will also be pleased to see the first opinion. Over time the published opinions of the GAAR Advisory Panel will help to clarify the scope and application of the GAAR – and the circumstances in which HMRC will seek to invoke it.
In this specific case HMRC will now be able to use the GAAR to counteract the tax advantages the company and its directors had claimed were available. In doing this it will presumably follow the panel’s view of the most likely comparable commercial transaction the company could have adopted (without the addition of contrived or abnormal steps). The panel considered this to be the company funding an EBT followed by loans from the trustees of the EBT to Mr X and Mrs Y.
The taxpayers could of course appeal to the tribunal. If they do the GAAR legislation means that there are several procedural innovations:
- HMRC will be required to demonstrate that the GAAR applies (rather than the taxpayer showing that it does not apply);
- The tribunal or court must take account of the guidance approved by the GAAR Advisory Panel, at the time the arrangements were adopted; and
- The tribunal or court must also take into account the opinion, or opinions, of the GAAR Advisory Panel given to HMRC on the case in question.
Appealing to the tribunal would almost certainly involve details of the company and its directors entering the public domain; cases are usually held in public and decisions are rarely anonymised. Given the robust opinions of the GAAR panel this might not be very appealing in this case.
Professional Conduct in relation to Taxation
The latest edition of the PCRT rules (effective from 1 March 2017) includes guidance on the responsibilities of ICAS members (and members of other professional bodies covered by PCRT) in relation to GAAR.