HMRC publish GAAR guidance

HMRC has published guidance on the scope and procedures for the new general anti-abuse rule (GAAR) which will come into effect when the Finance Bill 2013 is passed later this year, reports Chartered Accountants Northampton Harris & Co.

The guidance states that the GAAR applies to ‘tax arrangements’ which are ‘abusive’, which is defined in broad terms as "any arrangement which, viewed objectively, has the obtaining of a tax advantage as its main purpose or one of its main purposes’.

However, HMRC also says the legislation includes safeguards to ensure that ‘any reasonable choice of a course of action is kept outside the target area of the GAAR’.

For example, the guidance says that options such as deciding to trade as a limited company rather than a sole trader, or putting investments into an ISA, are well beyond the intended scope of the GAAR.

The guidance says that ‘using statutory incentives and reliefs to support business activity and investment in a straightforward way (for example business property relief, EIS, capital allowances, patent box) are also not caught by the GAAR’.

Where the new rules do apply are instances where HMRC judges MRCHMRC taxpayers are ‘entering into contrived arrangements to obtain a relief but incurring no equivalent economic risk.’ In such cases, HMRC says it will apply a ‘double reasonableness’ test which requires HMRC to show that the arrangements ‘cannot reasonably be regarded as a reasonable course of action’.

However, HMRC also warns there may be some arrangements which appear to be so blatantly abusive that it would be appropriate for HMRC to invoke the GAAR without first completing the exercise of determining whether the arrangements would achieve their intended tax result under the rest of the tax rules.

This means it will not be possible for a taxpayer to object to the use of the GAAR simply because all other means available to HMRC to tackle what they consider an abusive arrangement have not been utilised.

Unlike the general position in tax cases, it is HMRC that is required to demonstrate that the GAAR applies, and not for the taxpayer to show that it does not apply. Specifically, HMRC needs to show that there are tax arrangements; that these tax arrangements are abusive; and that the counteraction proposed by HMRC is just and reasonable.

The procedure for applying the GAAR requires HMRC to put any proposal to do so before an advisory panel of independent experts who will give their opinion as to whether the arrangements in question constitute a reasonable course of action. HMRC officials will not be able to commence counteraction under the GAAR without such prior consent, and the taxpayer is entitled to see evidence that consent has been obtained.

HMRC’s new guidance includes definitions of ‘tax advantage’ and ‘tax arrangements’ and also indicates that the GAAR is to be extended to cover NICs, subject to the necessary legislation being passed.

Alex Henderson, tax partner at PwC, said:

‘Today"s guidance highlights the GAAR aims to end extreme avoidance, not the centre ground of tax planning. There are clear examples of what the GAAR won"t cover, such as reliefs to support business activity and investment. This will help reassure tax payers and prevent business being gummed up by uncertainty. The guidance is also important for managing expectations - ordinary international tax arrangements are outside the GAAR"s scope.’

HMRC has also published examples of how the GAAR will work in practice, which Henderson said were helpful in explaining its impact in areas such as IHT and stamp duty, where there had been some uncertainty.

Henderson stated:

‘Overall the new guidance is very helpful but it will be a few years before we can really see the impact of the new anti-abuse rule.’