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Tony Wickenden: A closer look at GAAR

Tony Wickenden Tax Planning Technical Area

Last week I started my look at the proposed General Anti-Abuse Rule (GAAR). I noted especially that the new rule will, in effect, be a more narrowly drawn rule targeted at abusive schemes as opposed to a more broadly drawn rule that could affect a wider number of schemes but for which there would be a much stronger need for a more extensive clearance facility to give the required level of certainty. As we will see, though, even the more narrowly drawn anti-abuse rule is not without its critics in relation to the uncertainty that its terms could create. Extracts from the June 12 consultation document (Condoc) are in bold italics.

The Government states that

The GAAR aims to target artificial and abusive tax avoidance schemes which, because they are often complex and/or novel, could not have been contemplated directly when formulating the tax legislation. The GAAR will apply to counteract, on a just and reasonable basis, the tax advantage that would otherwise be obtained.

Reassuringly, the Condoc makes it clear that

The GAAR should not affect what the Report describes as ‘the centre ground of tax planning.’

This should be seized on and used by financial planners looking to put clear blue water between what they do for their clients and the kind of ‘egregious and abusive’ schemes that the Government refers to in the Condoc.  As to the Government’s aspirations for the GAAR, they are made very clear in the Condoc.

A GAAR may lead to a simpler tax regime for the UK, by: enabling future tax rules to be drafted more simply and clearly; reducing the need for specific remedial legislation; and in time (once confidence in the effectiveness of the GAAR is established), paving the way for a reduction and simplification of the existing body of detailed anti-avoidance rules.

The Government intends that the GAAR will be an effective deterrent against artificial and abusive tax avoidance, and will over time influence the culture of tax planning. To the extent that it deters and discourages taxpayers from entering into artificial and abusive schemes and the future development of such schemes, the need for further targeted anti-avoidance rules (“TAARs”) may be reduced.

The reference to ‘changing the culture’ of tax planning is one especially worth noting.

And GAAR coverage and application will be wide. It is intended that all of these taxes could have GAAR applied.

  • Income Tax
  • Corporation Tax (including taxes linked to Corporation Tax, such as the Bank Levy)
  • Capital Gains Tax
  • Petroleum Revenue Tax
  • Inheritance Tax, and
  • SDLT and the enveloped property annual charge

The GAAR will also apply to NICs, but this will require separate legislation and this is likely to be enacted after the GAAR has been introduced. To the extent that they are not specific to tax or to specific taxes, the questions and issues raised in this document should also be considered in relation to NICs.

Before considering the most important (and, it is thought, relatively clear and easy to understand) provisions of the proposed GAAR it’s worth just reflecting on the overriding purpose of the GAAR. This is summed up in the explanation of the introduction to the draft GAAR as follows:

This opening statement makes clear at the outset that the purpose of the GAAR is to counteract tax advantages arising from abusive arrangements. The GAAR is by nature a general rule, and this statement, by setting out a clear overall purpose, should make it easier for taxpayers and their advisers to consider and interpret the provisions that follow, and in many cases help them to conclude quickly that the GAAR has no application.

The provision also introduces three concepts that are key to the operation of the GAAR: “tax arrangements”, “abusive” and “tax advantage”.

I will consider these in detail next week.


Tony Wickenden is joint managing director of Technical Connection

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