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HMRC brings GAAR and tax avoidance rules back in the spotlight

A recent case thwarting a tax avoidance scheme serves to remind people the general anti-abuse rule exists and HMRC is not afraid to use it


A recent case thwarting a tax avoidance scheme serves to remind people the general anti-abuse rule (GAAR) exists and HMRC is not afraid to use it.

The introduction of the general anti-abuse rule four years ago generated a bit of excitement at the time (well, in tax planning circles it did anyway).

Since then, though, the GAAR has received very little publicity. And why would it? It has not been used. Its existence is periodically acknowledged but it has very much occupied an “it is there if needed” position.

The authorities appear to have relied on targeted anti-avoidance rules, litigation and publicity to stamp out aggressive tax evasion that defeats the intent of Parliament. These effective strategies have been supplemented by disclosure of tax avoidance schemes, follower notices and accelerated payment notices, which also have a very positive effect on HM Revenue & Customs cash flow.

The news

That said, this summer, the GAAR was used to combat and render ineffective a tax avoidance scheme founded on the payment of directors through gold bullion.

The case was referred to the GAAR advisory panel, which said it was a clear example of attempting to “frustrate the intent of Parliament” by using intricate and precise steps to exploit tax loopholes.

HMRC will use the GAAR to impose a “just and reasonable” tax liability; in effect, one that would have accorded with the intent of Parliament for such transactions.

HMRC winning majority of tax avoidance cases

Without going into too much detail, it seems the scheme involved a purchase of gold for the employees/directors by the employer company. The employees immediately sold the gold, settling the company’s liability to pay the third-party gold supplier in return for a director’s loan account credit in their favour.

At the same time, a long-term obligation was created under which the employees were required to pay in the future an amount at least equal to the purchase price of the gold (plus indexation) to the trustees of an employee benefit trust.

The scheme was intended to achieve an immediate corporation tax deduction for the company and avoid an income tax and National Insurance contributions charge on the employees under both the money’s worth (the obligation to settle into the EBT was relevant) and disguised remuneration rules.

Unsurprisingly, the GAAR advisory panel regarded the steps in this case as “abnormal and contrived”, seeing no reason for the arrangement other than for tax avoidance purposes.

In a statement following the panel’s decision, HMRC said it had “wide-reaching impacts and reinforces the power of the GAAR in tackling abusive tax avoidance”. It also said: “We are delighted with the opinion of the GAAR advisory panel. HMRC has already made clear that gold bullion avoidance schemes do not work and that we will challenge these schemes.”

HMRC wields ‘dawn raid’ powers to stop tax cheats

HMRC’s decision to refer the scheme to the panel of experts who advise on the application of the GAAR had surprised some commentators, who generally considered that litigation would have resulted in a relatively easy win for HMRC.

Some have concluded that the use of the GAAR process against those contemplating, promoting or undertaking aggressive tax avoidance is HMRC’s way of reminding people the rule exists and it is not afraid to use it.

The fundamentals
So, let’s refresh our knowledge of the fundamentals:

  1. The GAAR was introduced in the Finance Act 2013 and took effect from 17 July 2013. It is intended to counteract tax advantages arising from tax arrangements that are abusive.
  2. Tax arrangements exist where obtaining a tax advantage is one of the main purposes of the transactions.
  3. The GAAR can apply across a number of taxes including (but not limited to) income tax, capital gains tax, corporation tax, inheritance tax, NIC, stamp duty and the diverted profits tax.
  4. Some amendments to the GAAR were introduced by the 2016 Finance Act but the fundamentals remain.
  5. To complement the legislation, HMRC published guidance in April 2013 which states the GAAR represents a distinct move to a legislatively-supported purposive approach rather than one that is founded on the letter of the law. The guidance sets out the parliamentary intention that the statutory limit on reducing tax liabilities is reached when arrangements are put in place which go beyond the “double reasonableness” test (see below).
  6. Just what is a tax arrangement is clearly important in determining how the GAAR can be applied. A tax arrangement is any arrangement which has the effect of obtaining a tax advantage as its main purpose or one of its main purposes. This sets a low threshold for considering the possible application of the GAAR. However, any arrangement to be caught by the GAAR must also be abusive.
  7. So what is abusive? Abusive tax arrangements are arrangements that entering into or carrying out cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.
  8. Indeed, the so-called “double reasonableness” test is widely seen as the main safeguard for the taxpayer. This requires HMRC to be able to show that the arrangements entered into “cannot reasonably be regarded as a reasonable course of action”.
  9. Where tax arrangements are found to be abusive, the tax advantages are counteracted by the making of adjustments which “are just and reasonable”.
  10. Helpfully, Part D of the guidance contains numerous examples of when an arrangement might or might not be treated as abusive in the context of the GAAR, when applying the double reasonableness test.



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True Potential Investments head of risk and compliance Sheriden Davy has left the firm after two years in the role. Before joining True Potential in May 2014, Davy was BlackRock‘s compliance and monitoring vice president. He also held senior roles with the Department for Work and Pensions and employee benefits administrator MyCSP. According to the […]


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