An introduction to GAAR and the undead
Ok, the title mixes two separate horror franchises. That said, some might say the Walking Dead is somewhat derivative of the 28 Days Later etc… not even getting on to the Last of Us.
There are some parallels between GAAR and this genre of horror.
The most desperate (and, believe me, I do desperate) is I often thought that some of the ‘walkers’ in WD were moaning “GAAR!!?!” as they wobble around the environs of Atlanta.
Perhaps when they eventually wrapped up the series, I would have found find that the mysterious infection was accidentally created by a NT Advisers tax scheme? However, I gave up once Rick bit the dust.
Secondly, conceptually, one might think of the UK tax system as being one of the big creaky old houses in which the aforementioned Rick and his cohorts often took refuge.
The flaking plaster and crumbly bricks being the substantive legislation.
GAAR, however, is the handily placed floorboards that can nailed to the windows to keep out the undead.
Finally, I remember when its creator, Graham Aaronson KC described the new post GAAR world to a packed Pump Court Tax seminar. The horror was palpable. He may as well have been describing the newly evolved Cordyceps fungus to the world (OK, I did get to Last of Us, after all)
When does GAAR apply?
First of all, and the clue is in the title.
This this is an anti-abuse rule. It isn’t an anti-avoidance rule.
Don’t get your acronyms in a twist.
Tax arrangements must be abusive. As such, one could read as being at the really foul end of aggressive tax planning and avoidance.
It certainly does not cover tax planning.
Of course, determining where things fall on a spectrum is not always easy. But that’s for another time.
GAAR has applied since 17 July 2013 hence why I am offering this article as an alternative birthday cake.
What are abusive tax arrangements?
First of all, one needs to have ‘tax arrangements’.
The bar is set deliberately low to qualify. I don’t mean qualify in a good way.
Essentially, if you are considering whether something you have done is a tax arrangement then it is almost certain that it is!
However, and you can put down the stiff drink, that is not the end. GAAR only applies where those ‘tax arrangements’ are also “abusive tax arrangements”
As such, the key as to whether GAAR’s applies to a given piece of planning is whether something is ‘abusive’ or not.
GAAR defines ‘abusive’ by reference to a test known as the double reasonableness test.
The double reasonableness test is so named because GAAR dictates that tax arrangements are abusive:
‘if, having regard to all the circumstances, entering into the arrangements or carrying them out cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.’
Yes, enough to drive anyone into the rotting arms of the undead.
Believe it or not, this is described as an objective test. In any event, it requires us to consider:
- whether the tax arrangements are, having regard to all the relevant circumstances, a reasonable course of action, and
- in turn, if that view (the view that they are or are not reasonable) is itself reasonable
This means that that the tax arrangements are not protected from the ravages of GAAR just because someone holds the view that the arrangements are a reasonable course of action.
This is because that person’s view might be unreasonable.
However, if that view is reasonable then the double reasonableness test does not trigger GAAR.
Understood?
What to consider?
The legislation gives us some things to consider…quite literally.
It tells us we need to consider a list of things when determining whether tax arrangements are abusive:
- whether the substantive results of the arrangements are consistent with the principles (whether express or implied) and policy objectives of the relevant tax provisions;
- whether the means of achieving the substantive results involves one or more contrived or abnormal steps—the terms ‘contrived’ and ‘abnormal’ are not defined and therefore take their ordinary meaning and would cover the inclusion of a step or feature that would not otherwise have been included, and
- whether the arrangements are intended to exploit any shortcomings in the relevant tax provisions (aka loophole)
The GAAR legislation also provides us with three potential indicators that an arrangement might be abusive and also an indicator that suggests otherwise. These are, of course, non-exhaustive.
Perhaps what is more helpful is the GAAR Guidance produced by HMRC. In Part D of this document HMRC has set out its view on what arrangements are within (and outside of) GAAR.
HMRC and GAAR
In principle, the taxpayer has a responsibility to self-assess under the GAAR.
However, this is a bit loopy as, presumably, if one thought the planning was in GAAR then one wouldn’t have entered in to the planning?
As such, the legislation also enables HMRC to apply the GAAR. However, HMRC are required to follow certain procedures if they want to make such an adjustment, and the required steps differ depending on the type of notice HMRC issues to the taxpayer.
The GAAR Advisory panel
I have referred to the GAAR panel a few times above.
Who is this enigmatic band of men and women?
For starters, the GAAR advisory is a HMRC established panel. Their duties are as follows:
- they must review and approve the GAAR guidance which is drafted by HMRC; and
- when required, provide opinions regarding the reasonableness or otherwise of the relevant tax arrangements
They are not paid for these duties.
GAAR guidance
Most guidance (for example, the DOTAS guidance) issued by HMRC is just that.
It does not have any statutory footing – although one would be foolish to ignore it.
The status of the GAAR guidance is somewhat different.
The legislation states that a court or tribunal must specifically take into account the GAAR guidance (assuming it has received approval from the GAAR advisory panel).
It therefore has a statutory footing.
The GAAR guidance has a section which provides many examples of what HMRC believes falls foul of GAAR. The fact that an example is listed, and assuming it has been approved by the panel, then it is likely to mean that the relevant arrangement is within its remit.
GAAR Advisory Panel Opinions
So what happens when an issue is referred to the GAAR advisory panel?
They spring in to action by forming a sub-panel. This sub-panel is comprised of three members who should hold the appropriate expertise to deal with the matter in hand.
The sub-panel will consider each matter on the basis of written summaries from:
- HMRC; and
- the taxpayer
There are no hearings or oral evidence.
The panel can provide one or more reasoned opinions, depending on whether the members of the sub-panel come to a unanimous view or not.
It is also in the sub-panel’s gift to come to the conclusion that they do not have sufficient information to reach a view on whether the arrangements were reasonable or not.
So, what is the test?
The task of the sub-panel is to consider is whether the entering into and carrying out of the tax arrangements is, or is not, a reasonable course of action.
This is known as the single reasonableness test.
Note this is not the double reasonableness test described above. Under the single reasonableness test there is no requirement for the sub-panel members’ view to be reasonable. It is merely their view of the reasonableness of the tax arrangements in question.
They are not considering whether or not the GAAR applies since that would require the double reasonableness test to be applied.
GAAR Penalties
Originally, the General Anti Abuse Rule (“GAAR”) did not have any specific penalty regime attached to it.
It was described as toothless by campaigners against tax avoidance.
Some might say that a toothless member of the walking dead was nothing to fear.
However, from 15 September 2016, taxpayers who entered into arrangements that were counteracted by the GAAR are liable to a penalty of 60% of the value of the counteracted tax.
Big pointy teeth.
A decade on – Has GAAR been a success?
It took a while for opinions to start trickling through from the GAAR Advisory Panel. However, there is now a steady flow of cases.
These include Stamp Duty schemes, gold bullion schemes, so-called remuneration trusts and other arrangements that it is difficult to disagree with the GAAR panel’s ultimate decision.
Most (but not all) published opinions have found that the transactions were ‘not a reasonable course of action’.
It has to be said that these have been the types of arrangement we were told that GAAR would intercept.
There has been a clear and significant reduction in the number of tax avoidance schemes being marketed. Indeed, outside of contractor style schemes, I would say the marketed tax scheme world there is no longer an industry of any note.
As such, GAAR has been an objective success?
However, my own view is that the introduction of Accelerated Payment Notices (“APNs”) and their linking to DOTAS was the first stake through the heart. Anyone entering into a DOTAS scheme lost any economic benefit – including any cashflow benefit.
The second stake was the introduction of the enablers regime. This meant that, if the brown stuff did hit the fan, the scheme promoter would lose any profits they made from shilling the scheme.
So, it might be said that GAAR is more totemic than anything else.
Some puzzling elements
If GAAR is working then, it seems to me, that an opportunity is being missed for simplification.
For example, if so-called remuneration trusts and similar structures are found by the GAAR panel (and in the tax and administrative courts) as simply to be convoluted ways of avoiding ITEPA 2003, s62 then why do we need the long and complex provisions of Part 7A of ITEPA 2003?
A contrary point is that one might expect that, once a transaction is found to fail the GAAR panel’s reasonableness test, then Parliament would discuss the transaction and, presumably, make legislative provision for it? If having raised the issue, the GAAR is ultimately ignored by Parliament, what does this say about Parliament’s intention? It is at best indifferent?
Conclusion
Despite widespread consensus that artificial and abusive schemes were unacceptable, there was a concern that GAAR might be prone to mission creep.
Indeed, in his initial report setting out his view of any provisions, Graham Aaronson KC was at pains to point out that reasonable tax planning should remain unaffected by it.
This warning seems to have been upheld.
For now, unless you are participating in highly artificial and contrived schemes then, unlike Rick and his colleagues, you should not get bitten.
If you have any queries or comments on this article, or would like to discuss post apocalyptic horror shows, then please get in touch.