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Tony Wickenden: When exactly will the GAAR be applied?

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As much as many people wanted a clearance system, at least in the early stages of the development of the GAAR, one does not exist. 

The official rationale for the absence of a clearance mechanism, apart from cost, is that a narrowly based provision such as the GAAR does not require one.

When the GAAR comes into force is clearly stated in B18 of the guidance notes:

“The GAAR will have effect in relation to any arrangements which are entered into on or after the date on which the Finance Bill 2013 is passed into law.” 

The guidance notes continue: The Finance Bill 2013 since passed into law on 17 July 2013. There is a specific provision that enables reference to be made to transactions that were entered into before that date if, but only if, referring to those earlier arrangements would help show that the later arrangements were not abusive.

Please see Part D for examples illustrating how the commencement rules will be applied in practice.

Part C of the guidance notes contains more detail on the specific meaning of tax arrangements, tax advantage and abusiveness – the three key principles of the GAAR.

I will focus in this article on ‘abusiveness’.

The legislation (reproduced in guidance note C5.3) states the following: “S204(2)-(6) FB 2013: (2) Tax arrangements are ‘abusive’ if they are arrangements that the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including:  

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions;  

(b) whether the means of achieving those results involves one or more contrived or abnormal steps; 

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.  

“(3) Where the tax arrangements form part of any other arrangements regard must also be had to those other arrangements.  

“(4) Each of the following is an example of something which might indicate that tax arrangements are 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, and  

(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, but in each case only if it is reasonable to assume that such a result was not the anticipated result when the relevant tax provisions were enacted.  

“(5) The fact that tax arrangements accord with established practice, and HMRC had, at the time the arrangements were entered into, indicated its acceptance of that practice, is an example of something which might indicate that the arrangements are not abusive.  

“(6) The examples given in subsections (4) and (5) are not exhaustive.”  

The test of abusiveness is a critical factor that needs to be present if the GAAR is to be applied to a transaction, and C5.4 of the guidance notes sets out what are thought to be the key elements of the test. 

“C5.4 There is a number of key elements in this provision: 

  • The concept of a reasonable course of action in relation to the relevant tax provisions. 
  • Comparing the substantive results of the arrangements with the principles on which the relevant tax provisions are based and with the policy objectives of those provisions; seeing whether there are contrived or abnormal steps.
  • Seeing whether the arrangements are intended to exploit any shortcomings in the relevant provisions.  
  • The ‘double reasonableness’ test – whether the arrangements cannot reasonably be regarded as a reasonable course of action…”  

If that’s when the GAAR will be applied, when won’t it be? I will look at this next week. 

Tony Wickenden is joint managing director at Technical Connection

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