HM Revenue and Customs (“HMRC”) has estimated that tax avoidance, the organisation of financial affairs to minimise tax liability, costs the treasury £5 billion per annum. This issue has been given an increasingly high profile in the media in recent months, not least as a result of high profile individuals and companies participating in such practices, and the “big tax case” involving the former Rangers Football Club. 

Whilst there are currently several measures in place which attempt to combat tax avoidance, there is a perception that these are not strong enough. In response to this, the UK Government announced a range of measures intended to limit opportunities to avoid tax in its 2012 Budget. The Government estimates these changes will add £1 billion to its tax receipts over the next five years, and protect a further £10 billion of receipts against potential avoidance.

One of these measures was the introduction of a General Anti Abuse Rule (“GAAR”). The final draft legislation for this rule has been published as part of the Finance Bill 2013.

General Anti-Abuse Rule

The GAAR has its roots in a study led by Graham Aaronson QC in 2010, which was intended to evaluate whether such a rule could deter and counter tax avoidance, whilst at the same time provide a cost effective tax regime which is beneficial to businesses. Mr Aaronson recommended that, whilst a broad spectrum GAAR would not be beneficial, a more targeted rule would help to deter contrived and artificial schemes, whilst still allowing responsible tax planning. He suggested that such a rule should only apply to schemes which had the sole purpose of avoiding tax.

The main purpose of the GAAR is to target schemes which, because of their complexity or novel character, were not envisaged by the relevant tax legislation.

The draft legislation contains a broader rule than that recommended by Mr Aaronson. However, the GAAR will only apply to tax arrangements which are entered into after the legislation comes into force. The following questions must be considered, all of which must be answered in the affirmative for the GAAR to apply:

  1. Are the arrangements “tax arrangements”? - defined as arrangements for which, 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 arrangement. The guidance published by HMRC suggests that the term arrangement will be interpreted broadly.
  2. Do the arrangements lead to a “tax advantage”? - the draft legislation provides a number of results which will be considered as tax advantages, but this is not necessarily a comprehensive list. Examples include obtaining or increasing tax reliefs or repayments; avoiding or reducing charges or assessments; avoiding obligations; and obtaining advantageous timing of payments. The HMRC guidance states that this is to be given a “very wide meaning”, and HMRC will compare the actual arrangements with a hypothetical alternative which complies with the relevant legislation, in order to determine if a tax advantage has been achieved.
  3. Does the tax advantage relate to one of the taxes to which the GAAR applies? – the GAAR will apply to corporation tax; income tax; capital gains tax; petroleum revenue tax; inheritance tax; stamp duty land tax; and the annual residential property tax. It is also intended that the GAAR will cover National Insurance Contributions in due course, although further legislation will be required to allow this.
  4. Is it reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the legislation? – The HMRC guidance states that, where there is a single arrangement, incidental steps taken as part of that arrangement to minimise a tax liability arising from the arrangement will not usually constitute a main purpose.
  5. Are the arrangements “abusive”? - tax arrangements will be considered abusive if they cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances. These circumstances may include whether the results of the arrangements are consistent with the principles on which the relevant tax provisions are based; whether the achievement of the result involves one or more contrived or abnormal steps; and whether the arrangements are intended to exploit shortcomings in tax legislation.

The draft legislation also contains examples of indicators that arrangements may be abusive, including if the arrangement in question leads to the profits of a business for tax purposes being significantly less than its profits for economic purposes. However, an arrangement will not be considered abusive if it conforms to established practice and HMRC has indicated its acceptance of this practice.

The legislation states that when a tax arrangement meets each of these tests, the tax advantages that arise from it will be counteracted by the making of just and reasonable adjustments. These adjustments can be made by the taxpayer in any returns to HMRC, or by HMRC themselves. If a taxpayer appeals against such an adjustment, the onus is on HMRC to prove to a tax tribunal or court that the tax arrangement in question is abusive, and that the counteraction of the arrangement is just and reasonable.

A GAAR advisory panel will be set up to monitor the implementation of the GAAR. Whilst this panel will be appointed by HMRC Commissioners, no HMRC officers will be members of the panel which is to provide a view independent of that of HMRC, despite the fact it will not be truly independent. In addition, it will have only an advisory role, meaning HMRC will not be bound by its views. An interim advisory panel is being chaired by Mr Aaronson and will monitor the progress of HMRC guidance prior to the appointment of a permanent chairman in January 2013.

Whilst reaction to the legislation has been somewhat mixed, there appears to be agreement that, if the draft legislation is implemented, it will become much more difficult to run a successful tax avoidance scheme. Some practitioners have suggested that the broad nature of the legislation may mean that arrangements which have traditionally been considered legitimate tax planning fall foul of the GAAR and are considered abusive.

Whilst the HMRC guidance contains practical examples of schemes which may be caught by the legislation, these tend to apply to uncommon circumstances, and it remains to be seen how robustly HMRC approach enforcement. The rhetoric seems to be that HMRC will pursue perceived tax avoiders much more aggressively than they have in the past, in an attempt to neutralise the benefits of schemes.


Whilst the GAAR is not yet law, and the way in which it will be implemented and enforced remain unclear, it is important that individuals and businesses consider their tax affairs in light of the draft legislation, and particularly whether any recurring or planned tax arrangements will be compliant with the legislation. The GAAR will require individuals and companies to be much more careful in the organisation of their tax affairs and each of the above questions should be considered. Only time will tell how the legislation is interpreted by HMRC, the Tax Tribunal and the courts.