The UK's Tax Law General Anti-Abuse Rule: A Quick and Simple Guide

Understanding UK tax regulations can be challenging, especially when dealing with complex frameworks like the General Anti-Abuse Rule (GAAR). Designed to combat abusive tax arrangements, the GAAR is a critical tool in maintaining the integrity of the UK tax system. The guide below offers a straightforward overview of the GAAR, its purpose, and how it applies, making it accessible for business leaders and legal professionals alike. Whether you are navigating tax compliance or simply broadening your expertise, this article simplifies the essentials you need to know about the GAAR.

1.?The UK GAAR Legislation and Other Sources

?? 1.1.?The GAAR legislation is provided for in:

• Part 5 of the UK Finance Act 2013 (hereinafter - "the FA 2013").
• Schedules 43, 43A, 43B, 43C, and 43D of FA 2013.
• Sections 10 to 11 of the UK National Insurance Contributions Act 2014.

The GAAR applies to arrangements entered into on or after 17.07.2013.

?? 1.2.?To better understand how the GAAR legislation works in practice, it is recommended to refer to the guidance and other publications prepared by the UK tax authority (HM Revenue and Customs, or HMRC), the opinions of the GAAR Advisory Panel, as well as relevant case law.

? Pursuant to section 211 of the FA 2013, in determining any issue connected with the GAAR, a court or tribunal:

• Must take account of HMRC’s GAAR guidance approved by the GAAR Advisory Panel and opinions of the GAAR Advisory Panel about tax arrangements.
• May take account of guidance, statements or other material in the public domain at the time the arrangements were entered into (e.g. HMRC’s factsheets on the GAAR) and evidence of established practice at that time.

2.?What Is the GAAR?

?? 2.1.?Broadly, “general anti-avoidance rule” is a concept which empowers the Revenue Authority in a country to deny tax benefit of transactions or other arrangements which do not have any commercial substance and the only purpose of such a transaction is achieving the tax benefit [1].

?In the UK, the expression “general anti-abuse rule” (GAAR) stands for the set of provisions that govern counteracting tax advantages arising from tax arrangements that are abusive, as set forth in part 5 of the FA 2013 (section 206 (2) of the FA 2013).

The GAAR is aimed at targeting tax avoidance broadly. By contrast, there exist specific or targeted anti-avoidance provisions that tackle particular tax avoidance schemes (for instance, transactions in securities or transfer of assets abroad legislation in the UK).

In essence, the GAAR provides a statutory mechanism for HMRC to counteract abusive tax avoidance arrangements – those, which, although within the letter of the law, are not what was intended by the Parliament [2].

The purpose of the GAAR is to discourage taxpayers from entering into abusive tax arrangements, and to deter the promotion and enabling of such arrangements [3] (including to counter contrived attempts to circumvent targeted anti-avoidance legislation [4]).

?? 2.2.?If there are tax arrangements that are abusive, the tax advantages that arise from them are to be counteracted by HMRC by making adjustments (section 209 (1) of the FA 2013).

? Adjustments as the method of counteraction:

• Must be just and reasonable (section 209 (2) of the FA 2013).
• May inter alia impose or increase a liability to tax (section 209 (4) of the FA 2013).
• May be made by way of an assessment, the modification of an assessment, amendment or disallowance of a claim, or otherwise (section 209 (5) of the FA 2013).

?? Among other things, the GAAR is capable of counteracting abusive arrangements that result in UK tax advantages being obtained under double tax treaty provisions [5].

?? 2.3.?The GAAR does not provide for a clearance system of its own. Therefore, a taxpayer cannot approach HMRC for any GAAR related clearance for a transaction like e.g. within the transaction in securities framework.

?? A taxpayer who is uncertain whether an arrangement is within the scope of the GAAR may make a “white space disclosure” in the Self Assessment return indicating the uncertainty (paras. B16.5 and B17.1 of HMRC’s GAAR Guidance, Part B).

3.?Application of the GAAR

?? 3.1.?The GAAR is applied if the following 3 circumstances are present in conjunction:

• There is a tax arrangement;
• The tax arrangement is related to the tax covered by the GAAR;
• The tax arrangement is abusive.

?? If one them is absent, then the GAAR will not work (for example, where there is a tax arrangement, but it is not abusive).

?? 3.2.?The term “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable) (section 214 (1) of the FA 2013).

Arrangements are “tax arrangements” if, 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 arrangements (section 207 (1) of the FA 2013).

?? So, if the arrangement satisfies the “main purpose” test, the arrangement is a tax arrangement.

As this test is objective, HMRC does not have to establish the taxpayer’s subjective purpose (paras. С3.3 and С3.4 of HMRC’s GAAR Guidance, Part C).

? The “main purpose” test is met inter alia (paras. С3.5 and С3.6 of HMRC’s GAAR Guidance, Part C):

• If the arrangement would not have been carried out at all but for the opportunity of obtaining the tax advantage.
• If a non-tax (commercial) purpose is secondary to the benefit of obtaining the tax advantage.
• If an arrangement has been “reshaped” or entered into under different terms to change “significantly” the tax result that would otherwise have arisen.

?? A “tax advantage” includes (section 208 of the FA 2013):

• Relief or increased relief from tax.
• Repayment or increased repayment of tax.
• Avoidance or reduction of a charge to tax or an assessment to tax.
• Avoidance of a possible assessment to tax.
• Deferral of a payment of tax or advancement of a repayment of tax.
• Avoidance of an obligation to deduct or account for tax.

???3.3.?The GAAR applies to the following taxes (section 206 (3) of the FA 2013):

• Income tax.
• Corporation tax.
• Capital gains tax.
• Petroleum revenue tax.
• Diverted profits tax.
• Apprenticeship levy.
• Inheritance tax.
• Stamp duty land tax.
• Annual tax on enveloped dwellings.
• Multinational top-up tax.
• Domestic top-up tax.

???3.4.?Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances (section 207 (2) of the FA 2013).

??? This is often known as the “double reasonableness” test.

?While the “main purpose” test sets a low threshold (because of broad definitions of “arrangements” and “tax arrangements”), the “double reasonableness” test narrows the scope of the GAAR (para. B10 of HMRC’s GAAR Guidance, Part B).

The “double reasonableness” test requires HMRC (or the court / tribunal) to consider whether there can be a reasonably held view that entering into or carrying out the tax arrangements in question is a reasonable course of action. This means that HMRC (or the court / tribunal) must consider what the range of reasonably held views is. If there is a reasonably held view (even if HMRC, or the court / tribunal does not agree with it) that entering into or carrying out the tax arrangements in question is a reasonable course of action, the test is not satisfied. If there is a conflict of views, the test is not satisfied (para. C5.10 of HMRC’s GAAR Guidance, Part C).

? The circumstances that will be taken into account while applying the “double reasonableness” test include [6]:

• Whether the results of the arrangements are consistent with the principles and policy objectives of those tax provisions.
• Whether the way in which those results are obtained involves one or more contrived or abnormal steps.
• Whether the arrangements are intended to exploit any shortcomings in those tax provisions.
• Whether the arrangements produce a tax loss which is significantly greater than the economic loss, or a taxable profit or gain which is significantly smaller than the economic profit or gain.
• Whether the arrangements result in a claim for the repayment (or credit) of tax that has not been paid, and is unlikely to be paid.
• Whether the arrangements are consistent with established practice that had been accepted by HMRC.

?4.?Examples of Arrangements That Are or Are Not Abusive

?? 4.1.?The GAAR sets out 3 examples of circumstances that might indicate that tax arrangements are abusive (section 207 (4) of the FA 2013):

• The arrangements result in significantly less income, profits or gains being taken into account for tax purposes than the true economic amount.
• The arrangements result in significantly greater deductions or losses being taken into account for tax purposes than the true economic cost or loss.
• The arrangements result in a claim for the repayment or crediting of tax that has not been, and is unlikely to be, paid.?

?? 4.2.?The GAAR provides an indicator of non-abusive tax arrangements: that tax arrangements accord with established practice and HMRC had, at the time the arrangements were entered into, indicated its acceptance of that practice (section 207 (5) of the FA 2013).

?? 4.3.?Part D of HMRC’s GAAR Guidance specifies examples of arrangements that are or are not abusive. These examples are categorised as follows:

• Intended legislative choice (not abusive). Where the Parliament gave the taxpayer a choice as to the course of action to pursue, and the taxpayer chooses the course that saves the most tax, that is not abusive. This category might also include reorganising a trust or corporate structure in a straightforward way to fit in with a new tax regime (para. D2.2.2).
• Established practice (not abusive). This category emerges from section 207 (5) of the FA 2013 and takes a number of arrangements that have contrived or abnormal steps outside the scope of the GAAR. This category covers situations where arrangements have become rooted into tax or business practice in such a way that it would be wrong now to treat them as abusive (para. D2.3.1).
• Situations in which the law deliberately sets precise rules or boundaries (not?abusive unless artificial steps are introduced). Where the tax provisions are prescriptive and the taxpayer has complied with them, then the arrangements are unlikely to be considered to be abusive. E.g., the grant of an option rather than making an immediate sale to defer capital gains tax would be permissible, provided that there are no artificial features (para. D2.4.1).
• Standard tax planning combined with some element of artificiality. This may be considered either abusive or not depending on the facts and circumstances of a particular situation (para. D2.5.1).
• Transactions that are demonstrably contrary to the spirit, or policy and wider principles, of the law (abusive). For instance, the GAAR is applied to arrangements in which something very contrived or uncommercial has been done in order to fit the particular arrangements within a legislative framework (para. D2.6.1).
• Transactions that exploit a shortcoming in legislation the purpose of which is to close down a form of activity (abusive). This includes seeking to exploit loopholes or shortcomings in a targeted anti-avoidance rule (para. D2.7.1).
• Contrived or abnormal arrangements that produce a tax position that is inconsistent with the legal effect and economic substance of the underlying transaction (abusive) (para. D2.8).

5.?The Counteraction Procedure

?? 5.1.?The procedure of counteraction of abusive tax arrangements is mainly stipulated in Schedule 43 to the FA 2013.

??It consists of the following key steps:

• HMRC gives the taxpayer a written notice of proposed counteraction. This occurs where HMRC considers that a tax advantage has arisen to the taxpayer from abusive tax arrangements and this advantage ought to be counteracted.
• The taxpayer has 45 days to send to HMRC written representations about the proposed counteraction or to take the corrective action specified in the notice to counteract the tax advantage.
• If the taxpayer does not do either, HMRC must refer the matter to the GAAR Advisory Panel. Where representations are made, HMRC refers the matter to the GAAR Advisory Panel if after considering them HMRC still believes that the tax advantage ought to be counteracted.
• If a referral is made, the taxpayer has 21 days to make written representations to the GAAR Advisory Panel.
• The GAAR Advisory Panel considers the matter, invites the taxpayer and/or HMRC to supply further information (if necessary) and gives an opinion as to whether entering into and carrying out the relevant tax arrangements was a reasonable course of action in relation to the relevant tax provisions having regard to all of the circumstances.
• HMRC considers the GAAR Advisory Panel’s opinion and notifies the taxpayer in writing whether the tax advantage is to be counteracted and if so the adjustments required to counteract it. If the Panel considers the arrangements are reasonable, HMRC may still challenge the arrangements, although it seems unlikely in practice [2].
• The taxpayer does not have the right of appeal against a final notice of counteraction. But it is possible to appeal to the court / tribunal against the measures HMRC takes to counteract the tax advantage (e.g., amending the tax return).

??? Since 2018, HMRC has issued over 5,500 GAAR notices (applying GAAR Advisory Panel opinions) to taxpayers who have used abusive tax arrangements [3].

??? 5.2.?HMRC is entitled to:

• Issue a “pooling notice” to anyone whose arrangements are substantially the same as lead arrangements which have been referred to the advisory panel but where HMRC has not yet issued a final counteraction notice (para. 1 of Schedule 43A to the FA 2013). The purpose of pooling notices is to pool equivalent arrangements so that the GAAR Advisory Panel can opine on equivalent arrangements without having each individual case referred to it.
• Make a “generic referral” to the GAAR Advisory Panel where several taxpayers have used substantially the same arrangements (and have therefore been given a pooling notice), but HMRC has encountered difficulties in bringing a suitable lead case (Schedule 43B to the FA 2013). For instance, this happens where pooling notices have been issued and the lead taxpayer subsequently settles if none of the pool step forward to become the lead arrangement.
• Issue a “notice of binding” if the advisory panel has already opined and a counteraction notice has been issued to another taxpayer in relation to equivalent arrangements (para. 2 of Schedule 43A to the FA 2013).
• Issue a “protective GAAR notice” – to prevent from expiring the time limits to correct a tax advantage (section 209AA of the FA 2013).

6.?The GAAR Advisory Panel

The GAAR Advisory Panel is the panel of persons established by HMRC for the purposes of the GAAR (para. 1 (1) of Schedule 43 to the FA 2013) – to provide a safeguard for taxpayers by giving an impartial opinion [6].

?This is an independent body made up of 8 experts with legal, accountancy and commercial backgrounds [3]. HMRC is not represented on the GAAR Advisory Panel [6].?

It sits in a sub-panel of 3 members (para. 10 (1) of Schedule 43 to the FA 2013).

??The GAAR Advisory Panel has 2 functions [7]:

• To approve HMRC’s guidance on the GAAR.
• To deliver opinions on cases where HMRC considers the GAAR may apply (whether the entering into and carrying out of particular tax arrangements is or is not a reasonable course of action in relation to the relevant tax provisions).

?7.?Penalties

HMRC can charge penalties for arrangements entered into on or after 15.09.2016 (section 212A of the FA 2013).

?? The penalty is 60?% of the value of the counteracted advantage. This amount is fixed and does not change to reflect the taxpayer’s culpability. But HMRC has discretion to mitigate a penalty (exercised in exceptional cases only).

List of Cited References:

[1]?https://www.pwc.com/cz/cs/danove-sluzby/danova-politika/assets/gaar-general-anti-avoidance-rule-en.pdf.

[2]?https://www.pinsentmasons.com/out-law/guides/the-uks-general-anti-abuse-rule.

[3]?https://assets.publishing.service.gov.uk/media/66a8ebc349b9c0597fdb0784/HMRC_annual_report_and_accounts_2023_to_2024.pdf (p. 117).

[4]?https://www.gov.uk/government/publications/gaar-advisory-panel-opinion-of-16-december-2020-artificial-repayment-of-a-loan-or-advance-to-a-participator.

[5]?https://assets.publishing.service.gov.uk/media/5f5a2633d3bf7f723b6c34bd/gaar-part-d-2020.pdf (pp. 35 – 37).

[6]?https://www.gov.uk/government/publications/compliance-checks-information-about-the-general-anti-abuse-rule-ccfs34a/information-about-the-general-anti-abuse-rule.

[7]?https://www.gov.uk/government/groups/general-anti-abuse-rule-advisory-panel.