GAAR proposals take shape

In the last budget the Chancellor announced his intention to introduce a “General Anti-Abuse Rule” or GAAR, to try to prevent aggressive forms of tax avoidance. 

There has been a lot of speculation since then about the scope of the GAAR and how broadly it would be drawn, but we can now see for ourselves the way that government thinking has developed on the subject, as on 12 June 2012 HMRC issued a consultation document which outlines the key proposals.

The good news for the international finance centres is that the Government has shied away from a broadly drawn anti-avoidance rule (on the grounds that it would cause uncertainty which would be detrimental to UK business interests) and instead focused on artificial and abusive tax avoidance schemes which, because of their complexity or novelty, could not have been contemplated when formulating tax legislation. The GAAR will apply to counteract, on a just and reasonable basis, the tax advantage that would otherwise be obtained.

The consultation paper explicitly states that the proposed GAAR is intended to have narrower application than most general anti-avoidance rules found in other jurisdictions, which usually have potential application to a broad spectrum of tax avoidance, and confirms that the GAAR should not affect what the review described as “the centre ground of tax planning”.  So far, so good, but the devil, of course, lies in the detail.

Some examples are included in Annex B of the consultation document of the type of schemes that should fall within the GAAR.  These include accounting tricks to obtain relief for “losses” that have no economic basis and generating artificial tax deductions through the use of “repo” (sale and repurchase) agreements.  

The draft legislation introduces three concepts that are critical to the operation of the GAAR: “tax arrangements”, “abusive” and “tax advantage”.

“Tax arrangements” are defined as arrangements that, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

The consultation paper states that: “Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action….”.  In deciding whether the abusive test is met, many circumstances need to be considered including “the relevant tax provisions” and “their policy objectives”. Clause 2(4) also gives some examples of tax arrangements which may be abusive – for example, where “the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes”.

The third concept is “tax advantage”, which is already common in UK tax legislation.

The taxes that the GAAR will initially apply to include income tax, corporation tax, capital gains tax, inheritance tax and stamp duty land tax. The intention is also to extend the GAAR to national insurance at a later date.

The draft legislation also places the onus upon HMRC to show that an arrangement falls within the scope of the GAAR – potentially a practical problem for HMRC given recent publicity about the huge backlog of cases they are already grappling with.  However, the consultation paper proposes to mitigate this, and to provide the taxpayer with some safeguards, by establishing an Advisory Panel to provide a quick and cost-effective way of helping both taxpayers and HMRC identify the borderline where the GAAR applies.  The Advisory Panel would also publish opinions from time to time and provide a mechanism for updating and expanding the guidance on the GAAR.

Despite the safeguards which have been built in to try to minimise disruption, the financial centres should be under no illusion that the introduction of the GAAR (expected in the 2013 Finance Act) will undoubtedly cause a period of uncertainty or disruption for clients and service providers alike.  Nevertheless, it is undoubtedly true that the GAAR proposals are not as bad as some had feared they could e – a small crumb of comfort in difficult times.