GAAR – The General Anti-Abuse Rule

GAAR won’t affect any Hamilton Bradbury contractors but it’s important to know the facts before deciding on a payment vehicle

GAAR and the Contractor Marketplace 

These days contractors have to take into account all kinds of different legislation when making tax planning decisions. If it isn’t the dreaded IR35 then it will be the Managed Service Legislation, the Offshore or Onshore Intermediaries Legislation or the Agency Workers Regulations. In 2013 another important piece of legislation was added to that long line – the General Anti-Abuse Rule (GAAR) that was contained in the Finance Act of 2013.

The General Anti-Abuse Rule (GAAR) in Brief.

GAAR came into effect on the 17th July 2013 and was introduced in order to counteract any ‘tax advantages arising from any tax arrangements that are abusive.” The legislation is built around the fact that tax arrangements exist (and have always existed and will probably always exist) wherein obtaining a tax advantage is ‘one of the main purposes’ of those arrangements. This obviously gives the legislation a potentially massively wide scope and makes it nigh on impossible to ignore when making tax-planning decisions, particularly as it applies across a number of different types of taxes. Moreover, when HMRC published notes of guidance regarding the legislation they made very clear that GAAR was intended to be a clear break from the old way of thinking and operating. Previously, court decisions tended to lean towards the tax philosophy of being entitled to try as hard as possible to cut your tax obligation, as summed up by Lord Clyde ‘every man is entitled if he can to order his affairs so that the tax attracted under the appropriate act is less than it otherwise would be.’ This way of thinking was now to be corrected and the guidance made clear the intention of Parliament that the statutory limit on the reduction of tax liabilities would now be reached when such arrangements are put in place as might ‘go beyond ‘anything which could reasonably be regarded as a reasonable course of action.’

Further to this guidance there was some explanation as to the terms used. A ‘tax arrangement’ is considered to be any arrangement that, when looked at objectively, would have the effect of giving someone a tax advantage as its main aim or one of its main aims. Again, this sets a very low threshold for when GAAR applies but it is qualified by the addition of the word ‘abusive.’ For tax arrangements to be considered ‘abusive’ they must be ‘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.’ And finally, there is the safeguard (for the taxpayer supposedly) of the ‘double reasonableness’ test which requires that HMRC are able to prove that any arrangements entered ‘cannot reasonably regarded as a reasonable course of action.’

Reasons for the Introduction of GAAR

Basically, the GAAR has been brought in because HMRC always seemed to be playing catch up with accountants and tax avoidance schemes. In the past HMRC’s tax laws were always targeted at any loopholes they may have spotted in current legislation. This led to a sticking plaster approach and a constant sense of trying to catch up with the market – leading to a patchwork quilt of tax laws and a tax code that was seemingly one of the most complicated in the world. The introduction of a general rule against abusive arrangements therefore makes sense from HMRC’s point of view.

How GAAR Works in Practice

If a taxpayer is found to have been using a tax arrangement or strategy that is caught by the GAAR regulations then the law will kick in and HMRC will reverse all of the tax benefits and omissions that that taxpayer has received thanks to the arrangement they adopted. This of course could lead to heavy penalties in the form of a large bill for unpaid taxes, penalties and interest charges.

Who decides whether GAAR applies?

The process will be that an officer of HMRC will be the one to determine whether an arrangement is abusive and then they will refer the taxpayer in question to a special GAAR panel. This panel will in turn rule on whether the contractor has been caught by the GAAR. The contractor can then either accept their decision or appeal to a first tier taxation tribunal, which is made up of business people and tax experts (in an effort to ensure that it is independent of HMRC.)

GAAR was originally intended to apply mainly to income tax and corporation tax but also ended up applying to:

  • Income Tax
  • Corporation Tax (including amounts chargeable or treated as Corporation Tax)
  • Capital Gains Tax
  • Inheritance Tax
  • Petroleum Revenue Tax
  • Stamp Duty Land Tax
  • Annual Residential Property Tax

More information can be found at the HMRC resource centre, which offers more than 150 pages of guidance, despite the actual legislation only being 8 pages long.

How Is GAAR Affecting Contractors?

It is too early to say, but there is still a great deal of concern in the contracting community as to how implementation will be handled. James Abbot of the contractor accountant’s Abbot Moore noted last year that:

“The legislation says that HMRC’s guidance must be taken into account when determining whether a particular tax strategy is abusive. Not surprisingly, there is considerable concern amongst the tax community that HMRC has such a big say in the process … in the current climate of anti-avoidance bordering on anti-tax planning, ‘reasonable’ can be a loaded word, open to interpretation.”

According to Abbot, GAAR was intended to attack the more abusive and aggressive tax avoidance vehicles and arrangements, not the average run of the mill taxation plans.

Sure, They Say That Now…

And that’s the problem right there. HMRC may only be aiming at high-end abusive models right now, but there is no guarantee that HMRC wont come after the lower salaried contractors in the future. It’s not as if they don’t have form in that department and contractors are understandably cynical about the future. Abbot cites the example of New Zealand, which also used GAAR legislation:

“The GAAR in New Zealand is even more loosely worded than the UK legislation. There it was used by the local revenue to go after two surgeons who had set up a limited company. It successfully reversed the tax savings they had made.”