Updated guidance approved by an interim Panel (of which I was a member) was published yesterday. It is very different from HMRC’s first draft – not least because it now approaches 200 pages. It will be apparent that my comments below are limited to observations on the guidance in the final approved form.
Overview of the GAAR
The GAAR is meant to be a narrowly focussed rule targeted at abusive tax avoidance schemes. It is not meant to solve all challenges facing the UK tax system, including many cases of the sort which have generated media and Parliamentary debate. Nor does it replace other anti-avoidance rules or the approach to statutory interpretation adopted by the courts in recent years.
Before the GAAR can apply:
- there needs to be tax arrangements i.e. arrangements which have the obtaining of a tax advantage as their main purposes or one of their main purposes;
- HMRC have to show the arrangements are abusive i.e. cannot reasonably be regarded as a reasonable course of action; and
- HMRC must obtain one or more opinions from the Advisory Panel on whether the arrangements constitute a reasonable course of action.
Shades of Grey
Even with comprehensive guidance it will not always be easy to spot what is and is not caught by the GAAR. The principles set out in the legislation need to be worked through systematically in every case.
The examples in the previous draft of the guidance were on the extremes and crafted very much in black and white terms. A key concern of commentators was that the guidance gave examples not just of transactions obviously incapable of being affected by the GAAR or clearly within the ambit of the GAAR but also of transactions on the fringes – ones that might be affected (because of the wide definition of tax advantage and/or the main purpose test) but in fact were not. The process of reasoning why they might or might not be affected is equally important.
I believe that the approved guidance delivers on this point. It now recognises that there are many courses of action open to taxpayers under a sophisticated tax system like the UK’s. And the mere fact that taxpayers take into account the tax consequences of possible courses of action does not mean that tax is automatically a main purpose of the arrangements.
These shades of grey will inevitably give rise to some uncertainty in situations that are not expressly covered by the guidance, but that is unavoidable with a rule like the GAAR. However, to help give some certainty beyond the scope of the guidance the interaction of the GAAR with HMRC clearances has been clarified. Provided that full disclosure has been made then and to the extent that the statutory procedure covers the tax in question, the GAAR cannot undermine an HMRC clearance unless the cleared transaction is part of wider abusive arrangements.
Some of what's not changed
The GAAR is still meant to be self-assessed i.e. a taxpayer that believes the GAAR could apply to it should assess its tax as if the GAAR did apply. In appropriate circumstances, failure to do so could attract penalties.�
Some commentators have argued that if one or more opinions from the Advisory Panel are that a taxpayer’s actions were a reasonable course of action, HMRC ought not to be able to proceed further. HMRC may still do so despite a contrary opinion from the Panel but indications of circumstances where it would appropriate for HMRC to discount such opinions may in practice now limit the occasions when HMRC do so.
Undoubtedly the introduction of a GAAR into the UK tax code does potentially increase uncertainty but I believe that the approved guidance goes a long way towards providing as much certainty as might reasonably be expected.