GAAR advisory panel backs HMRC in first independent opinion

Employee incentive arrangements in which workers were paid using gold bullion are “abnormal” and not a “reasonable course of action in relation to the relevant tax provisions”, according to the GAAR Advisory Panel.

The GAAR Advisory Panel was set up in 2013, to coincide with the entry into force of the general anti-abuse rule (GAAR). It provides guidance and non-binding opinions on cases where HMRC considers that the GAAR may apply.

The GAAR itself applies to the main direct taxes and is designed to prevent ‘artificial and abusive’ tax avoidance schemes that fail to pass a ‘double reasonableness’ test, showing that the arrangements “cannot reasonably be regarded as a reasonable course of action”.

“The first GAAR panel opinion unanimously held that the arrangements were artificial – perhaps not surprisingly, as they involved both gold bullion and an employee benefit trust,” said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com. “While HMRC may well have won the case if it had gone to litigation, using the GAAR panel to give a clear ‘keep off the grass’ warning is a cheaper and quicker route to deter highly artificial schemes.”

“What will be more interesting will be if the panel rules against HMRC in a future case, holding that the planning is reasonable. It remains to be seen whether the GAAR panel can be a shield for taxpayers, as well as a sword for HMRC,” she said.

The GAAR had been asked for its opinion in a scenario where a company wished to incentivise two employees, referred to as Mr X and Mrs Y, in a way that “would not constitute remuneration for tax purposes”. Mr X was a director and 51% indirect shareholder in the company, while Mrs Y was the other director and 49% shareholder.

The company funded the purchase of gold for each of the employees, which was then immediately sold by the employees. The company’s liability to pay the third party supplier of the gold was then settled by the employees in return for a director’s loan account credit in their favour and a long-term obligation to an employee benefit trust (EBT).

The panel published three separate 11-page opinions, one relating to the tax position of the company and one each relating to the tax position of each of the employees. It concluded that it was “abnormal” both for an employer to reward its employees using gold, and for the asset to be sold “immediately after the purchase”.

“In this case we can see no reason for the steps to involve gold, other than for tax purposes,” the panel said.

“Had cash been used, and gold not been involved, other than the saving of fees in relation to the purchase and sale of the gold, neither the company nor the employees would have been in a substantially different economic or commercial position … In our view the steps in this case involving gold are abnormal and contrived,” the panel said.

While it was not abnormal for an employer to establish an EBT on behalf of an employee, “it is, however, abnormal for the obligation to fund an employer established benefit trust to be fulfilled by its key employees”, the panel said.

“In this case we can see no reason, other than for tax purposes, for the steps involving the EBT to include the assumption by the employees of the company’s trust funding obligation … We are of the view that, taken together, the steps involving the EBT are abnormal and contrived,” the panel said.

“This is a clear case of associated taxpayers seeking to frustrate the intent of parliament by identifying potential loopholes in complex interlinking anti-avoidance legislation, and arranging a series of intricate and precise steps to exploit those loopholes so as to gain an unexpected and unintended tax ‘win’. It should not come as a surprise that we conclude the steps taken are not a reasonable course of action,” the panel said.