GAAR advisory panel backs UK taxpayer in anti-abuse dispute for first time

The panel’s opinion, delivered in April but published last week, covered a set of arrangements which sought to circumvent the tax provisions that bring amounts loaned by close companies to their participators into tax where the loans remain outstanding for more than nine months after the year end. The panel concluded that, despite the arrangements being contrary to the policy objectives of the legislation and exploiting a shortcoming in the legislation, the steps taken were a reasonable course of action for tax purposes.

The GAAR advisory panel was set up in 2013 to coincide with the entry into force of the UK’s general anti-abuse rule (GAAR). The panel provides guidance and non-binding opinions on cases where HM Revenue & Customs (HMRC) considers that the GAAR may apply.

HMRC’s referral dealt with a company, Z. Briefly, Z had lent money - £10.8 million over the relevant period - to its majority shareholder and director, M. Shortly prior to the point at which the loan to participator tax charge would have arisen, M repaid the loans to Z. The funds to repay these loans came from new loans made to M from another company, Y, which was a subsidiary of Z.

The panel found that the purpose of the loans to participator legislation is “to tackle a potential way to sidestep a tax charge on distribution of profits from a company” and concluded that the arrangements “clearly set out to defeat the policy objectives”. Further it found that there was an attempt to exploit a shortcoming in the legislation.

Ultimately, however, the panel concluded that the shortcoming in the legislation was so fundamental that it was not something that could be fixed by applying the GAAR: “Not covering group loans does seem a big and obvious matter and it does not seem to us that the GAAR can be used to cover such a gap”.

The shortcoming in the legislation related to the “repayment relief” provisions. These were introduced in 2013 to prevent bed and breakfasting or recycling of loans – requiring repayments of loans by the participator to the company to remain with the company for at least 30 days and denying relief where there are arrangements in place to extract the funds. Neither of these provisions dealt with the possibility of loans coming from other companies within a group.

The factors that played in the taxpayer’s favour included that there were no abnormal or contrived steps involved. It was reasonable for Y to decide to lend money, at a commercial rate of interest, to its ultimate majority shareholder, M. No value passed out of the company to M which had avoided tax. In addition, although the tax charge was eliminated, it was immediately replaced with another potential tax charge relating to the loan from Y.

At the same time, these arrangements were not part of wider tax avoidance arrangements. In particular, although there was a further ‘cycling’ of loans, with the loans from Y being repaid out of funds lent from Z again, in later years, there was no evidence that these arrangements were planned as part of the same arrangements.

Ian Robotham, tax disputes expert at Pinsent Masons, said: “It seems that HMRC has found the edge of the power of the GAAR – some legislative shortcomings are so substantive that the GAAR cannot be used to solve the problem. The only option is to close the gap with legislation”.

“HMRC often adopts a dual-pronged approach of pursuing lost tax based on its interpretation of the current law as well as seeking to change the law, often on a ‘for the avoidance of doubt’ basis. It is perhaps a sign of the level of HMRC’s conviction that this challenge would work that we have not yet seen evidence of a law change to plug the gap in this area,” he said.