The General Anti-Avoidance Regulations (GAAR) aim to prevent abusive tax avoidance schemes. The question is where the line should be drawn between prudent tax planning and abuse. How easy is it to fall foul of the new rules? Should accountants shut down their tax planning departments?
We are not dealing with illegal tax evasion here. We are talking about legal means of reducing tax: what might once have been called clever tax planning.
The fundamental premise 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". It therefore overturns previous case law that taxpayers were "free to use their ingenuity to reduce their tax bills by any lawful means".
Multi-nationals such as Google, Amazon and Starbucks have received bad press in recent years for structuring their companies in such a way as to keep tax to the minimum, and Jimmy Carr publicly apologised last year for his “terrible error of judgment” over the K2 tax scheme. Even David Cameron condemned it, saying: “There is nothing wrong with people planning their tax affairs to invest in their pension and plan for their retirement – that sort of tax management is fine. But some of these schemes we have seen are quite frankly morally wrong.”
What does the GAAR cover?
The GAAR covers income tax; corporation tax; capital gains tax; inheritance tax; petroleum revenue tax; stamp duty; and annual tax on enveloped dwellings.
The GAAR applies to tax arrangements which are “abusive” and defined as “any arrangement which, viewed objectively, has the obtaining of a tax advantage as its main purpose or one of its main purposes”.
The new rules apply to instances where HMRC judges taxpayers are “entering into contrived arrangements to obtain a relief but incurring no equivalent economic risk”. In such cases, the onus is on HMRC to show that the arrangements cannot be regarded as a reasonable way to structure one’s affairs. HMRC needs to show that the key purpose of the scheme is to avoid tax, and the counteraction by HMRC is reasonable.
They will then put the question to a GAAR advisory panel, made up of tax accountants and lawyers, to decide what is or is not reasonable.
Where should the line be drawn?
Not all tax-motivated arrangements will be abusive. On the right side of the line will be:
- Giving assets to children to reduce future IHT liabilities
- Sacrificing salary in return for enhanced pension rights
- Disclaiming capital allowances to preserve reliefs for a later period
- Deciding to incorporate a business or to sell shares rather than assets (in both cases so as to pay less tax or SDLT)
- Choosing to borrow to invest in buy-to-let rather than using surplus cash or having a bigger mortgage on your main residence
Arrangements that are contrived or abnormal and produce a tax position that is in no way consistent with the legal effect and economic substance of the underlying transaction will fall squarely into the GAAR territory. If you have structured affairs such that something very contrived or uncommercial has been done in order to fit the particular arrangements within a legislative framework then you are likely to fall foul of the rules.
Who’s affected and what does the future hold?
The rules were introduced in July 2013 and apply to schemes since. The biggest impact will be on owner-managed businesses, high earners and high net worth individuals – and of course, their advisers.
The Government’s next plan is to introduce new measures to deal with tax advisers who sell contrived and aggressive tax avoidance schemes. The Government has announced it will consult on proposals to introduce significant new information disclosure and penalty powers, to make it more difficult for the promoters of abusive schemes to market them in the future.
A word of warning for tax accountants and lawyers …
No longer will you get a pat on the back for ingeniously devising schemes to exploit loopholes in tax law. Instead you risk facing a complaint or claim from an aggrieved client suffering from an unexpected tax bill and possible reputational damage.
Accountants need not shut down their tax planning departments just yet, but the new legislation does seem to limit the scope for being too clever. It may also be that insurers will consider accountancy practices with tax planning departments as having a higher risk profile than previously.