Still on the GAAR, let’s have a look at when arrangements would not be considered abusive.
Section C5.12 of the guidance notes, which considers indicators of non-abusive tax arranagements is helpful in this regard:
“C5.12.1 S204(5) FB 2013 sets out an important possible indicator that arrangements are not abusive. This is where the arrangements accord with established practice, and HMRC had at the time when the arrangements were entered into indicated its acceptance of that practice.
“C5.12.2 There are two elements to this. The first is to consider whether the arrangements ‘accord with established practice’. This calls for a consideration of the arrangements and a consideration of the ’established practice’.
“C5.12.3 Taking the ‘established practice’ first, this is not defined in the legislation, and therefore has its ordinary meaning. Established practice may be demonstrated by reference to published material (whether from HMRC, or text books or articles in journals) or by other evidence of what had become a common practice by the relevant time (i.e. when the arrangements were entered into).
“C5.12.4 It is then necessary to consider whether the arrangements actually carried out were the same as those identified as established practice, or whether there were any significant differences between the actual arrangement in question and those that were commonly carried out. If, for example, the particular difference between the actual arrangement and the ‘normal’ arrangement was the introduction of some feature which was designed to achieve a particular tax advantage, then demonstrating what the established practice was would not necessarily protect the arrangement in question from being abusive.
“C5.12.5 The second limb of the established practice protection is that HMRC had, at the time the arrangements were entered into, indicated its acceptance of the practice. This requires careful consideration.”
This non-abusive indicator related to accepted HMRC practice is explained further in C5.12 where it is clear that the way in which HMRC indicates its acceptance and the nature of the acceptance will be important in considering whether ‘indicated accepted HMRC practice’ can be accessed and used by a taxpayer. These factors will affect the ‘weight’ that can be attributed to the ‘acceptance’.
That relief and tax effectiveness specifically given by the legislation is largely excluded from the GAAR will probably not be surprising to most practitioners. However, I think there are indications that this benign state of affairs may not be so evident when it comes to the attitude of some taxpayers.
Advisers have a real role to play here in reassuring clients over what is and is not permissible in the new world. The point being that more may be permissible and acceptable than clients may think.
As well as dealing with legally permitted tax savings there is also planning that represents ‘HMRC accepted practice’.
C5.12.6 is instructive on this:
“C5.12.6 First, the way in which HMRC may have indicated its acceptance of the practice could affect the weight given to the acceptance. For example considerable weight would be given to a clear statement made by HMRC in its published tax bulletins, or its internal manuals, or in correspondence with some representative body (such as the Law Society or the Chartered Institute of Taxation). Lesser weight would be given to a reference to the practice in correspondence with, say, an accountancy firm which did not involve the particular taxpayer but to which that taxpayer had gained access.”
Accepted HMRC practice underpins a number of the examples (given in Part D) of when the GAAR would not be applied. These include discounted gift trusts and Rysaffe planning based on multiple trusts.
This is hugely reassuring but one must also keep in mind that, as I have highlighted before, just because planning is not caught by the GAAR does not mean that it cannot be caught by a current or new targeted anti-avoidance rule. The proposed anti-fragmentation rule proposed in the trust simplification consultative document is a good example of this. The GAAR is very clearly set up to supplement and not replace legislation and litigation.
So what is the net effect of all of this for financial planners? Well, first, it can not be ignored. Clients should be given clear, informed guidance and reassurance over the aims of the GAAR and, as a result, what it is likely to affect and not affect.
The delivery of an attractive tax outcome is not a reason to fear the application of the GAAR. The delivery of a tax outcome out of line with economic reality, or which seems too good to be true, might be.
Particularly reassuring is that taking a ‘reasonable course of action’ in relation to the relevant tax provisions gives a complete ‘GAAR defence’ to Isas, pensions, EIS, and VCTs and that a strategy being within an accepted HMRC practice will not be affected by the GAAR.
The centre ground of tax planning ‘rules’ and boring is the new exciting.
Tony Wickenden is joint managing director of Technical Connection
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