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Tony Wickenden: When you need to be aware of GAAR

Tony Wickenden Tax Planning Technical Area

The General Anti-Abuse Rule is seen by many as the ‘centerpiece’ of the Government’s attack on ‘unacceptable’ tax avoidance.

The GAAR, in its proposed draft form, was, broadly speaking, intended to apply to ‘abusive tax arrangements’.

An arrangement that had as its main purpose (or one of its main purposes) the avoidance of tax would be a ‘tax arrangement’ for this purpose. A tax arrangement would be abusive if entering into those arrangements, or carrying them out, cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances. Those circumstances must include:

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

  • whether the means of achieving those results involves one or more contrived or abnormal steps; and

  • whether the arrangements are intended to exploit shortcomings in the relevant tax provisions.

As will be appreciated this rule, originally due to start from 6 April 2013, would be effective against many of the types of tax planning scheme that have recently been exposed in the National Press.

However, many professionals felt the rule went too far and, on a literal interpretation, could apply to any form of tax planning – perhaps even an Isa or registered pension. While the Government and HMRC denied that this would ever happen, that was of little comfort. There was also a concern at the way that the GAAR could be applied to IHT.

However, although the Government recognises that “IHT has a number of differences when compared to the other direct taxes and has complex interactions with trust and estates legislation”, it will still be covered by the GAAR as excluding it “would leave IHT potentially exposed to abusive avoidance schemes.”

In order to address some of the detailed concerns over the application of the GAAR to IHT, the Government proposes the following changes:

– the GAAR will not apply to tax arrangements that have already been entered into before the commencement date; an

– the draft legislation will provide that transactions or agreements that include non-commercial terms are no longer highlighted as indicators of abusiveness.

Returning to the general application of the GAAR, the possible wide extent of the GAAR was a main feature of the consultation process with the tax industry. Following representations, the Government has now announced that the legislation will include the following features:-

– In order to ensure that the GAAR applies only to its intended targets, the ‘double reasonableness’ test is to be refined in order to:

  • (i) clarify the circumstances to be taken into account in determining whether arrangements are abusive;
  • (ii) make clear that the specific indicators that an arrangement might be abusive are not relevant if it is apparent that the relevant tax rules were intended to secure that outcome; and
  • (iii) provide a specific indication that arrangements are not abusive if they are in accord with established practice and HMRC has indicated its acceptance of that practice. This may offer some reassurance to those worried about the application of the GAAR to IHT.

– The GAAR should take effect from the day on which the Finance Act 2013 is passed (probably late July 2013). Only arrangements entered into on or after that date can be within the scope of the GAAR.

– An interim group will be appointed to develop and approve the initial guidance in time for the introduction of the legislation into Parliament. HMRC will not be represented on the Advisory Panel.

– The Government also proposes:

  • an additional right for the taxpayer to make further comments to the Advisory Panel following HMRC representations
  • that the Advisory Panel should be able to ask for further information, from either HMRC or the taxpayer, that it considers necessary to form an opinion on a transaction.

Revised draft legislation and draft GAAR guidance have now been published by HMRC for consultation.

The reassurance in (iii) above that arrangements will not be abusive if they ‘are in accord with established practice and HMRC has indicated its acceptance of that practice’ will be met with great relief by those persons involved in providing general financial planning advice, particularly in the area of inheritance tax.

Financial planners will need to be aware of what the GAAR is likely to apply to so as to be in a position to advise clients in relation to what is unlikely to be ‘caught’. ‘Non-offensive’ tax planning in relation to the GAAR is likely to incorporate most of the strategies employed in traditional tax and financial planning.

Tony Wickenden is joint managing director at Technical Connection

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