Posted by James McNeile, Partner
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There has been much criticism in recent times of individuals and corporations who implement aggressive tax planning to limit their tax liability. In response to this the government has in its Finance Bill 2013, introduced the General Anti-Abuse Rule (GAAR) that aims to target and “deter tax payers [and their promoters] from entering into abusive arrangements” that seek to reduce their tax bills by any lawful means.
It has hitherto been the Court’s opinion, in the number of old cases, that taxpayers are entitled to use their ingenuity to eliminate or reduce their tax liability by exploiting any omissions that they may find in existing tax acts. But HMRC’s GAAR guidance paper published on 15 April 2013, states that Parliament rejects this approach out right as being “morally repugnant”. The government hopes that the GAAR will prevent taxpayers from going beyond what tax legislation intends in order to reduce their tax bill.
The GAAR will operate as a blanket measure over a number of taxes including income tax, capital gains tax, inheritance tax, corporation tax, stamp duty land tax, the new annual tax on enveloped dwellings and there is also an intention for it to be extended to National Insurance Contributions. The government have stated that their intentions are to prevent “abusive arrangements” and the HMRC guidance paper sets out a number of safeguards for taxpayers in the application of the GAAR; however, it remains to be seen how HMRC will implement the rule in practice.
The government has been quick to emphasise that a number of current and common tax planning schemes will not be caught by GAAR including investments into ISAs or gifting assets to children with a view of reducing inheritance tax (IHT) on the transferor’s death, together with commercial incentives such as business property relief, EIS, capital allowances and the new patent box regime. However, “entering into contrived arrangements to obtain a relief but incurring no equivalent economic risk” will bring the arrangements within the radar of GAAR. Part D of the GAAR guidance paper gives numerous examples of the types of arrangements that will fall in and outside the scope of GAAR, so it is advisable for clients and their advisers who are intending on undertaking extensive tax planning to consider whether HMRC have already indicated how those arrangements will be regarded. This may be particularly problematic if using a new unrecognised scheme. This will be of particular importance to clients and their advisers as there will be no HMRC clearance system to confirm that schemes will not fall foul of GAAR, and so many taxpayers may find themselves walking into unknown GAAR territory.
The GAAR will come into effect on or after the Finance Bill 2013 receives Royal Assent but there is a provision allowing for retrospective transactions to be caught before this date if can will shine a light on the abusiveness or lack thereof of some arrangements for the future.
As yet it is difficult to say how GAAR will work in practice and indeed there is likely to be much debate amongst experts and their clients as to whether it is truly possible to pull out of the grey area between prudent tax planning, which is inherently a form of tax avoidance, and the abusive tax avoidance that the government are trying so hard to eliminate.
If you have any comments on this blog please contact Tony Millson, Partner for the Private Client Department on 020 7583 2222 or firstname.lastname@example.org