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Tony Wickenden: The ‘TAT’ test for tax abuse

Tony Wickenden Tax Planning Technical Area

Last week I closed by summarising the three key factors that need to be present for the GAAR to be applied. The test is that there should be

Tax arrangements that are
abusive, and which deliver to the taxpayer
tax advantages

“TAT” – you heard it first here.

As for last week, extracts from the June 12 consultation document (Condoc) are in bold italics.

“Tax arrangements” and “tax advantages” are dealt with – at least partially – by this statement from the Condoc:

Arrangements are “tax arrangements” if, 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 use of the “main purpose” test is seen in many targeted anti-avoidance rules so its use in the GAAR causes no surprise.

The “main purpose or one of the main purposes” test recognises that incidental steps taken to minimise a tax liability arising from an arrangement will not usually constitute a main purpose. Whether a purpose is a main purpose of an arrangement is a question of fact.

Now how about “abusive”? This is where the GAAR embodies the previously referred to narrowing. Yes, the main purpose needs to be shown to be the securing of a tax advantage but there will also be a need to show that the arrangement was “abusive” – the real focus of the Government’s attack on schemes.

The Condoc explanatory notes state as follows in relation to what is and isn’t abusive.

(2) 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, having regard to all the circumstances including –

  • (a) the relevant tax provisions
  • (b) the substantive results of the arrangements, and
  • (c) any other arrangements of which the arrangements form part

(3) In subsection (2)(a) the reference to the relevant tax provisions includes –

  • (a) any principles on which they are based (whether express or implied)
  • (b) their policy objectives, and
  • (c) any shortcomings in them that the arrangements are intended to exploit

(4) Each of the following is an indication that tax arrangements might be abusive –

  • (a) the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes
  • (b) the arrangements result in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes
  • (c) the arrangements result in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid
  • (d) the arrangements involve a transaction or agreement the consideration for which is an amount or value significantly different from market value or which otherwise contains non-commercial terms

Subsection (4) is not to be read as limiting in any way the cases in which tax arrangements are regarded as abusive.

The GAAR is intended to be capable of altering the tax consequences of abusive arrangements if the consequence claimed is one that manifestly would not have been countenanced by Parliament, had it foreseen the arrangement and the claimed tax consequences. Such arrangements inevitably seek to take advantage of perceived limitations of, or shortcomings in, the tax legislation. Subsections (2) and (3) are intended to make clear that both Parliamentary intent and limitations in the relevant tax provisions are key considerations in the application of the GAAR.

So, if it is thought by HMRC that abusive tax avoidance arrangements exist that deliver tax advantages, what will HMRC do? Well, currently it would issue an assessment under (probably deficient) targeted legislation and possibly then rely on the tribunal/courts systems to enforce a “substance over form” purposive ruling if needed.

With the GAAR in force HMRC can take a clearer more certain course of action to counteract what it sees as “abusive” avoidance. I will consider further the application of the so-called “double reasonableness” test in relation to the application of the GAAR next week. It is this test that is generating the majority of the negative commentary on the proposed new rule.


Tony Wickenden is joint managing director of Technical Connection

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