There is no point in analysing or debating further whether we need or should have a General Anti Abuse Rule ("GAAR") or what it should look like – we are to have a GAAR and it will almost definitely be in the form set out in the Finance Bill published at the end of March ("FB 2013").
The key questions to now consider are:
- Will the GAAR only catch the most abusive and egregious arrangements?
- Will taxpayers and their advisers be able to assess the likelihood of the GAAR potentially applying with any real certainty in advance of implementing any tax planning arrangements?
The publication of HMRC's GAAR guidance (the "Guidance") approved by the Advisory Panel with effect from 15 April 2013 was therefore eagerly anticipated. In this Article we attempt to answer these key questions by considering the extent to which the Guidance is likely to be of real practical use to taxpayers and their advisers.
The Guidance has five parts. Parts A to C (the main Guidance) and Part D (the worked examples) run to 171 pages in total and are the focus of this article (Part E deals with procedure). There are 41 worked examples in Part D. In addition, there are around 25 or so references to specific scenarios in the main body of the Guidance. The key question becomes how much guidance and therefore certainty (and clarity) can be gleaned from the principles and examples set out in the guidance where a taxpayer is proposing to do something which is not referred to specifically?
We set out below a summary of the key principles we can discern from the Guidance focussing on the "double reasonableness test" which the Guidance refers to as "the crux of the GAAR test".
- Key principles
Taxpayers are no longer free to use their ingenuity to reduce their tax bills by any lawful means
The Guidance sets out the fundamental approach of the GAAR, stating that the GAAR "rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means" (paragraph B2.1 of the Guidance).
Several examples given in the Guidance support the principle that "abusive use" of what would otherwise be lawful transactions will now not work, including:
- The use of structures (such as unauthorised unit trusts) "in an inappropriate way to produce a tax result that is clearly contrary to the intended consequences of the law" (D9).
- Employers who enter into contrived and abusive arrangements to remunerate employees by paying what would have been earnings by way of a reversionary interest in an offshore trust to escape NICs (D25).
Taking the tax treatment into account as a commercial consideration is allowed
The Guidance provides that it is reasonable to take the tax consequences of a transaction into account. It gives the following examples:
- The decision to use debt rather than equity in financing the purchase of an asset because, in the circumstances, it is more tax effective will not trigger the GAAR. Such as choice is "entirely reasonable" (C5.6.3).
- It is "entirely reasonable" for an individual to take the different tax consequences into account when deciding whether to be a sole trader, set up a partnership or a company or be an employee (C5.6.4).
- It is within permissible boundaries for a taxpayer to enter into an unconditional contract to ensure that the disposal of his asset falls into the tax year when a reduced rate will apply (D17).
The Guidance also confirms that the mere fact that tax advice has been obtained will not of itself, be considered to be evidence of the fact that the taxpayer's adopted course is motivated by tax savings and that he is entitled to take the potential tax consequences of his proposals into account (C3.7).
In many circumstances there are different courses of action that a taxpayer can quite properly choose between
The Guidance recognises that under the UK’s detailed tax rules, taxpayers frequently have a choice as to the way in which transactions can be carried out, and that differing tax results arise depending on the choice that is made (B4.2 and B11.1). The GAAR does not seek to challenge such choices unless they are considered "abusive".
Later on, the Guidance says that the GAAR test recognises that some parts of the tax legislation reflect a clear policy of providing tax relief or other specified outcomes for certain courses of action. It states that "reasonable steps taken to achieve the outcomes envisaged by those rules, or to prevent benefits under those rules from being inappropriately denied, will be a reasonable course of action in relation to those rules" (C5.6.2).
The following scenarios – all of which are stated to fall outside the GAAR on the basis that they accord with what Parliament intended and are envisaged by the legislation - illustrate this principle:
- Investing in an ISA to take advantage of the income tax relief which such investments carry (B4.4).
- Giving assets away to children without retaining a benefit in the gifted asset (B4.4).
- Using statutory incentives and reliefs (such as capital allowances, patent box, business property relief and EIS schemes) in a straightforward way (B4.4).
- Disclaiming capital allowances to preserve reliefs for a later period (D2.2.1).
- Deciding to incorporate a business or to sell shares rather than assets in both cases so as to pay less tax or SDLT (D2.2.1).
- Reorganising a trust or corporate structure in a straightforward way in order to fit within a new tax regime (D2.2.2).
- Accessing trapped non-trade deficits carried forward in an intra-group scenario (D5).
- Structuring a transaction to allow disposing shareholders to accept sale consideration as either QCBs or non-QCBs (D16).
- Choosing to pay an employee's bonus by purchasing a vintage car which is added to the employee's car collection (ie not readily converted into cash) in order to save NICs under the benefit in kind rules (D23).
- Entering into SDLT 'saving' sale and leaseback arrangements (D32).
- Effectively extending the terms of a long lease but using a reversionary lease structure to reduce subsequent SDLT charges (D33).
However, the following scenarios are set out in the Guidance as cases where the GAAR may be applied (because they do not represent what the Guidance considers to be a "reasonable course of action" in the circumstances):
- A company seeks to "sell" losses it has incurred to an unconnected company and structures that sale by manipulating the various statutory loss buying anti avoidance rules which apply (C5.6.5).
- UK domiciled individuals who implement IHT 'saving' arrangements by setting up or buying into certain trust arrangements intended only for foreign domiciled individuals (C5.6.6).
- Arrangements implemented to circumvent certain CGT anti-avoidance rules introduced to prevent the main residence exemption being misused via settlor interested trusts (C5.7.5).
Achieving results through contrived or abnormal steps will often be caught
Adopting features to fall within or outside a specific piece of legislation is problematic. The example given is temporarily seeking to fall outside the tax group rules by transferring 26% of shares in a particular company to some unconnected company or temporarily transferring property to a foreign nominee (C5.8.1).
The Guidance also provides that circular cash flows will be treated as constituting contrived or abnormal steps and therefore be "abusive" (D5.5.2 and D5.6.1).
Taxpayer choices which are abusive or exploit legislative shortcomings are not allowed
The GAAR will look to effectively restructure arrangements carried out with a commercial purpose but which use contrived or "abusive" planning techniques to reach the same commercial outcome (C6.3.5).
The Guidance also states that the GAAR is intended to "bring to an end, so far as possible, to the game of legislative catch-up and to make sure that "keep off the grass" warnings are heeded" (D2.7). To this end, the examples given in the Guidance as falling on the wrong side of the GAAR line include:
- The transactions giving rise to the recent change of law in relation to debt buy-back through partnerships (D2.7.2).
- Devising ways to allow UK domiciliaries to buy interests in excluded property trusts for IHT purposes (D2.7.2).
- Devising contrived ways of circumventing the disguised remuneration rules (D2.7.2).
- The corporation tax shares as debt example (D8).
- Structuring transactions to access a capital allowances double dip (D10).
- Arrangements designed to create an artificial connection between the vendor and purchaser for SDLT purposes so as to engage the SDLT partnership computational rules and bare trust rules (D36).
If arrangements are consistent with the underlying policy and which accord with the spirit of the legislation then the GAAR will not apply
Examples of transactions which do not accord with the spirit of the legislation according to the Guidance are as follows:
- Structuring transactions to access relief (such as vaccine research relief) where it would not otherwise have been available (D11).
- Setting up transactions which would fail on a purposive interpretation of the legislation (D15).
- Using commodities in place of earnings to escape a NICs charge (D24).
- Implementing arrangements which bypass the IHT charge on death using an employee benefit trust (D29).
The approach in the GAAR represents a fundamental shift in approach from the House of Lords decision of Pepper v Hart1. It will be necessary to determine the policy objectives of the relevant tax provisions in order to apply the GAAR. For the purposes of determining the underlying purpose of legislation, the Guidance provides that reference may be made to, by way of example, consultation documents (D5.5.1) and Committee Stage debate (D8.5.3).
If arrangements accord with "established practice" then the GAAR will not apply
Where the tax arrangements accord with "established practice" and HMRC had accepted such practice at the time that the arrangements are entered into, this indicates that such arrangements are not abusive (clause 204(5) FB 2013).
The Guidance lists the following "simple" scenarios as being illustrative of this principle (D2.3.2):
- Creating something which qualifies as a quoted Eurobond for withholding tax exemption purposes but is not widely held (D2.3.2).
- Putting special provisions into a consideration loan note to make sure that it qualifies as a non-QCB (D2.3.2).
- Structuring a return of value to shareholders by a listed company so as to allow a choice as to whether those funds are returned in capital or in income form. The Guidance expressly acknowledges that so-called B share schemes would fall within this category (D2.3.2).
- Gift and loan trusts in an IHT context (D26 and D27).
It is worth noting that the Guidance expressly provides that the above discussion is not a failsafe against the GAAR applying – if elements of these arrangements are brought together in a way that is "abusive" or contrived – the GAAR will be applied notwithstanding the above.
The GAAR will not apply to arrangements which fall within the terms of prescriptive legislation (if there is no contrivance)
The Guidance provides that: "if the statute specifies a particular set of conditions quite precisely, then taxpayers are entitled to assume that they are on the right side of the line if they have satisfied the statutory condition and there is no contrivance about what they have done" (D2.4.1). To this end, the examples given by the Guidance include the following (D2.4.1):
- The rules for employee share options.
- Granting an option rather than making an immediate sale to defer CGT.
- Complying with bed and breakfast time limits when effecting market transactions in listed shares in order to trigger a capital loss.
- A gift of any share in a house where the donor and donee both occupy it, thus taking advantage of the IHT exemption by technically avoiding a reservation of benefit.
- Satisfying the long funding lease rules to ensure that capital allowances are obtained by one party rather than the other.
- Making an election for a dwelling to be treated as a principal private residence.
- Deciding to take a 10 year lease with an option to renew rather than a 20 year lease with a break clause and a higher SDLT charge.
However, there is a caveat: this principle does not apply to the extent that there is any "contrivance" (D2.4.1). To this end, D15 expressly includes the Mayes example as one where the GAAR would apply.
Some element of artificiality may not be caught
The Guidance provides that standard tax planning combined with some element of artificiality may not be "abusive" (D2.5).
The examples given to illustrate this point include:
- The facts of BMBF: setting up arrangements to fall into the finance leasing rules to enable a claim for capital allowances despite the fact that there was a circular cash flow (D2.5.3 and D7).
- Certain arrangements pursuant to which a gift or a distribution may be made from a trust with the primary objective of saving IHT but nevertheless have real economic consequences (D2.5.4).
- Where a company engineers itself into the late paid interest rules to secure that the interest is tax deductible on a paid rather than accruals basis (D2.5.3 and D6).
- Deriving benefit from the allocation of profits under international tax rules of itself is not abusive
The mere fact that the arrangements of a multi-national enterprise benefit from the rules set out in international tax treaties dealing with the allocation of profits to different states is not abusive (i.e. the GAAR is not a tool that could be used to increase the UK taxable profits properly attributable under international transfer pricing rules).
That said, D12 sets out an example which falls within the GAAR. The example, based on the facts of Huitson2 establishes that a wholly artificial scheme seeking to rely on the terms of the double tax treaty in a way that was not intended by either party to the double tax treaty is considered to be "abusive".
Clearly, if a taxpayer is thinking of doing something identical or almost identical to any the 41 actual worked examples or 25 or so other specific scenarios set out in the Guidance, then the taxpayer and their advisers can be certain as to how HMRC will seek to apply the GAAR. The principles set out in the Guidance are helpful and set out a framework for advisers to use when analysing other proposed transactions but the central question as to whether arrangements are "abusive" is still not clear cut especially in the case of a new transaction where there is no established practice. We therefore suspect it will still leave advisers in many cases often struggling to give the definitive opinions that clients will be seeking.