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Tony Wickenden: Reasons for not applying GAAR


Perhaps one of the most important reasons why the GAAR won’t be applied is where it can be proved that the “reasonableness” of the choices made by taxpayers in relation to their actions should be substantially determined by the nature of the tax rules that are engaged in that course of action. 

Sections C5.6.2, 3 and 4 of the guidance notes give the reassurance that where tax saving is specifically given by the legislation, the GAAR is highly unlikely to apply. 
The guidance notes state:  

“C5.6.2 This test recognises that some parts of the tax legislation reflect a clear policy of providing tax relief or other specified outcomes for certain courses of action (e.g. to invest in plant and machinery or into a pensions scheme or farming land). So reasonable steps taken to achieve the outcomes envisaged by those rules, or to prevent benefits under those rules from being inappropriately denied, will be a reasonable course of action in relation to those rules.  
“C5.6.3 In many other cases the legislative rules plainly contemplate that the taxpayer will exercise a range of different commercial or personal choices. As an example, a commercial airline wishing to replace its fleet of aircraft may purchase new aircraft outright, or lease them from an aircraft leasing company, or enter into a finance sale and leaseback; and if the decision is to purchase the aircraft outright, then it might do so by raising capital for that purpose through a share issue, or borrowing funds specifically for that purpose, or using its existing funds which would represent a mix of share capital, loan capital and accumulated reserves. Each of these choices would involve different tax consequences, and it is entirely reasonable for the company concerned to take these potential tax consequences into account in deciding what particular course of action it will take.  
“C5.6.4 To take an everyday example in the context of personal taxation, a hairdresser may consider setting up a salon as a sole trader, or doing so in partnership with other hairdressers, or becoming an employee of some unconnected company, or setting up a company to run the salon and working as an employee or director of that company. Each of these choices would involve different tax consequences, and again it is entirely reasonable for that individual to take these tax consequences into account when deciding which course of action to take.” 
In considering whether the GAAR applies, an important point is made about the fundamental importance of determining whether  an arrangement does or doesn’t accord with the “principles on which the provisions are based” and the “policy objectives” of those provisions. 
This is markedly different from the normal rule of statutory interpretation where it is necessary to consider the intention of parliament from the words used in the legislation. 
Indications of abusive arrangements are described in C5.11 of the guidance notes: 

• Arrangements resulting in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes; 
• Arrangements resulting in deductions or losses of an amount for tax purposes significantly greater than the amount for economic purposes; and  
• Arrangements resulting in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid.

The guidance notes continue:

“C5.11.3: As just noted, it is explicitly provided that such features will not be indicators of abuse if it would be reasonable to assume that they were anticipated (or indeed intended) when the relevant tax provisions were enacted. For example the capital allowance legislation may deliberately allow a taxpayer to claim a deduction for tax purposes in relation to capital expenditure on plant or equipment that is, in a particular period, substantially greater than the depreciation on those assets which is recognised for accounting purposes for that period. This result would clearly have been intended when the legislation was enacted.”

Important indications of non-abusive arrangements are well covered in C5.12, which I will look at next week. 

Tony Wickenden in joint managing director of Technical Connection

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