Draft clauses to introduce a new general anti-abuse rule (GAAR) into the UK tax code were published as part of the Finance Bill 2013 on 11 December 2012. Some form of general anti avoidance rule was first seriously canvassed in 2010 when a group, led by Graham Aaronson QC was set up to provide recommendations. The group did not recommend a “broad spectrum” general anti-avoidance rule, but instead, a moderate rule, targeted at only abusive arrangements. The principle behind this was to target highly abusive, contrived and artificial schemes widely regarded as intolerable, while not affecting the large “centre ground” of responsible tax planning. The government said that it broadly accepted the recommendations of the group and published, for consultation, draft legislation in June 2012 broadly consistent with the recommendations of the GAAR study group. The draft legislation published in December is largely along the lines of the previous draft although some changes have been made.
The legislation will apply to counteract tax avoidance advantages arising from tax arrangements that are “abusive”. In order for the GAAR to apply three conditions must be satisfied:
- there is an ‘arrangement’ involving tax avoidance (all taxes, other than VAT, stamp duty and stamp duty reserve tax are included);
- it is reasonable to conclude that the obtaining of a tax advantage was the main or one of the main purposes of the arrangement;
- the arrangement is “abusive” because having regard to all the circumstances, the entering into or carrying out the arrangements cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions (the so called “double reasonableness test”).
The circumstances to be considered now require an analysis of whether the substantive results of the arrangements are consistent with the principles and objectives of the relevant tax rules, whether the means of achieving those results involves “contrived or abnormal steps” and whether the arrangements are intended to exploit shortcomings in the relevant tax rules. The draft legislation also makes it clear that something is not to be regarded as abusive if it is apparent that the relevant tax rules were intended to secure that outcome, and further provides an additional safeguard so that arrangements may not be abusive where they are in accord with established practice and HMRC has indicated its acceptance of that practice. A change from the previous draft legislation is that transactions or agreements that include non-commercial terms are no longer highlighted as indicators of abusiveness.
The procedural requirements for the application of the GAAR have been fleshed out, with more detail on the role of the Advisory Panel which will now be completely independent from HMRC. The Advisory Panel will review and approve HMRC’s guidance on the GAAR and will also deliver non-binding opinions in individual cases. An anonymised version of these opinions will usually be published which will itself become useful guidance on the sort of arrangements that are considered to be caught by the GAAR.
The draft Bill confirms that the GAAR will not apply to tax arrangements entered into before the date of Royal Assent to the Finance Bill, expected in July 2013. An arrangement entered into after the commencement date which was part of an arrangement involving an earlier pre-commencement step will not be subject to the GAAR if the post-commencement arrangement is not abusive. Conversely, if the post-commencement arrangement is abusive, regardless of the pre-commencement step, then the GAAR may apply.
The draft GAAR rules still raise various issues and it is to be hoped that these issues are ironed out in the draft Bill consultation process. In particular, significant concerns remain regarding the ‘double reasonableness’ test.
HMRC have also published a first draft of the GAAR Guidance, which on an initial view does not seem that helpful. It is hoped that this is further developed in due course and finalised before the GAAR comes into effect so as to be more comprehensive.
It is still unclear exactly what types of arrangements are more likely to be scrutinised and if, and the extent to which, any structures used within the fund industry may be challenged under the GAAR. The risk of the GAAR being imposed may significantly hinder use of new or unusual tax-efficient structures. However with the appropriate commercial underpinning, planning should in many cases still be possible.
Furthermore, it could be worth considering implementing tax planning arrangements, such as remuneration planning, ahead of the GAAR commencement date.