The UK’s General Anti-Abuse Rule (GAAR)

The GAAR provides a statutory mechanism for HM Revenue & Customs (HMRC) to counteract tax avoidance arrangements which, although within the letter of the law, are not what was intended by parliament.

Where the GAAR applies HMRC can make a just and reasonable tax adjustment to counteract the abusive tax advantage that the taxpayer is seeking to obtain. The regime contains a number of taxpayer safeguards including the fact that before a final GAAR counteraction notice can be issued the proposed application of the GAAR has to be put before the GAAR advisory panel, independent of HMRC, who will give their opinion as to whether the arrangements in question constitute a reasonable course of action.  

HMRC’s guidance on the GAAR, except part E dealing with procedural issues, has been approved by the GAAR advisory panel. The guidance has a higher status than normal HMRC guidance because any court or tribunal which is considering the application of the GAAR must consider the parts of the guidance which have been approved by the panel.

When the rules apply

The GAAR applies to “tax arrangements” that are “abusive”. It applies to income tax, CGT, inheritance tax, corporation tax, petroleum revenue tax, SDLT, ATED, diverted profits tax, apprenticeship levy and NICs.

‘Arrangement’ is defined widely as including “any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable)”. ‘Tax arrangements’ are those where 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. A ‘tax advantage’ is any relief from tax, repayment of tax, avoidance, or reduction of a charge to tax, avoidance of a possible assessment of tax, a deferral of a payment of tax, or avoidance of an obligation to deduct or account for tax.

These definitions are wide and provide a low threshold, but the regime only applies to tax arrangements which are ‘abusive’.

Abusive tax arrangements

In order to work out whether the tax arrangements are abusive the so called ‘double reasonableness’ test has to be applied. The burden of proof is on HMRC to show that the arrangements are abusive. 

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 including:

• whether the substantive results of the arrangements are consistent with any principles on which those provisions are based, whether express or implied, and the policy objectives of those provisions;
• whether the means of achieving those results involves one or more contrived or abnormal steps; and
• whether the arrangements are intended to exploit any shortcomings in those provisions..

The legislation gives some examples of factors which will indicate the arrangements are abusive. These include where the arrangements result in income, profits or gains for tax purposes that are significantly less than the amount for economic purposes or deductions or losses for tax purposes that are significantly greater than the amount for economic purposes. However, the fact that tax arrangements accord with established practice, and HMRC had, at the time the arrangements were entered into, indicated its acceptance of that practice, might indicate that the arrangements are not abusive.

HMRC’s guidance gives examples of how the definition of abusive arrangements will be applied in practice. This confirms that where the tax legislation reflects a clear policy of providing tax relief or other specified outcomes, reasonable steps taken to achieve the outcomes expected from those rules, or to prevent benefits being inappropriately denied, will be a reasonable course of action in relation to those rules. It also confirms that if the legislation contemplates that a taxpayer can exercise a range of different commercial or personal choices, each involving different tax consequences, it would be entirely reasonable for the taxpayer to take the tax consequences into account when deciding the course of action to take.

Counteraction of the abusive tax arrangement

Where the GAAR applies HMRC will be entitled to counteract the abusive tax arrangement in a just and reasonable manner to recover any revenue that has been lost. This will usually be achieved by issuing or modifying assessments or disallowing or amending claims.

Decisions on the application of the GAAR must be taken by a designated HMRC officer, who will be a senior HMRC officer. In addition, the guidance states that HMRC's Counter-Avoidance Group will consider all arrangements where HMRC considers the GAAR may potentially apply before the issue is raised with taxpayers.

Issuing the notice: a step-by-step guide

• The first official step as far as the taxpayer is concerned will usually be the issue of a notice of proposed counteraction.
• The taxpayer then has 45 days to send written representations about the proposed counteraction to HMRC or to take the action specified in the notice to counteract the tax advantage.
• If the taxpayer doesn’t do either, HMRC must refer the matter to the GAAR advisory panel.
• If the taxpayer makes representations HMRC must consider those before deciding whether to refer to the panel.
• If a referral is made, the taxpayer has a further chance to make written representations and the panel must then give 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.
• If a referral is made to the advisory panel a ‘closed period’ begins 31 days after the 45 day period to make representations has ended. The taxpayer cannot make any GAAR related adjustments in the closed period, which will end the day before the taxpayer receives the advisory panel’s opinion.
• Once the panel has opined HMRC must consider the opinion and notify the taxpayer in writing whether the tax advantage is to be counteracted under the GAAR and if so the adjustments required to counteract it. If the panel considers the arrangements are reasonable HMRC can still continue to challenge the arrangements under the GAAR, although it seems unlikely that this would happen in practice.
• There is no right of appeal against a final notice of counteraction. Instead, the taxpayer can appeal in the normal way against the measures HMRC takes to counteract the advantage, such as amending a tax return. The burden of proof is on HMRC to show that the counteraction is just and reasonable. Any court or tribunal considering a GAAR issue must take into account any opinion of the advisory panel on the matter as well as the sections of the HMRC guidance approved by the panel.

Pooling notices, binding notices and protective notices

So that the advisory panel does not have to issue an opinion in relation to each user of a mass-marketed scheme, HMRC can 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. If the advisory panel has already opined and a counteraction notice has been issued to another taxpayer in relation to equivalent arrangements HMRC can issue a ‘binding notice’ to another scheme user. HMRC also has the power to make a generic referral to the advisory panel where pooling notices have been issued and the lead taxpayer subsequently settles if none of the pool step forward to become the lead arrangement.

In order that time limits to correct any tax advantages do not expire while the GAAR administrative process is ongoing, any HMRC officer, not just a designated one, can issue a protective GAAR notice and take action to counteract the tax advantage. If the taxpayer does not want to settle at this stage, they can appeal the adjustments made to counteract the tax advantage, but not the protective GAAR notice. However, any appeal will not proceed until the earlier of the date HMRC gives the taxpayer a final GAAR counteraction notice and 12 months after the date of the protective GAAR notice.

Penalties and other implications

Taxpayers are expected to self-assess their liability to the GAAR. In addition to countering the tax advantage, HMRC can issue a penalty when a taxpayer submits a return which includes arrangements entered on or after 15 September 2016 which are later found to come within the scope of GAAR. The penalty is charged at up to 60% of the counteracted tax. This is in addition to the normal penalties for incorrect returns.

There are other serious implications if the GAAR applies. If HMRC has issued a counteraction notice and at least two members of the GAAR advisory panel have opined that entering into the tax arrangements was not a reasonable course of action this may trigger the issue of an accelerated payment notice (APN). If the GAAR applies the enablers of tax avoidance rules may also apply resulting in sanctions for advisers involved in the arrangements.

Partnerships

Changes were made in 2021 to the GAAR procedural rules so that they work for partnerships. Notices can be issued on or after 10 June 2021, even if the arrangements were entered into before that date, to the responsible partner where a partnership return has been made on the basis that a tax advantage arises or might arise to one or more partners which would be within the GAAR. Only the responsible partner can make representations, but any of the affected partners can take corrective action to settle their own affairs so that they are no longer subject to the GAAR process.

Application of the rules in practice

The most difficult part of applying the GAAR rules is working out whether arrangements are abusive. It is clear that ordinary routine tax planning is not caught but there are many grey areas. Large businesses should be able to discuss borderline issues with their CCMs, but there is no clearance procedure in relation to the GAAR. The best a taxpayer who is unsure as to whether an arrangement will be subject to GAAR can do is to make a ‘white space disclosure’ on their return.

This guide is based on an article by Sukhbir Binning and Ian Robotham of Pinsent Masons which was published in Tax Journal on 14 January 2022.