Tax Planning v’s GAAR and the “Double Reasonableness Test” – Will GAAR stop tax avoidance abuse? Reply

UK tax return form

The general anti abuse rule (GAAR) has now been adopted by many advisers in the UK.

The GAAR will apply to Corporation Tax (and amounts treated as Corporation Tax), Income Tax, Capital Gains Tax, Petroleum Revenue Tax, Inheritance Tax, Stamp Duty Land Tax, and the annual tax on enveloped dwellings.

Heather Self, Pinsent Mason commented.  “Many of the examples are complex and contrived – we need more examples of ‘normal’ tax planning, to help show where the boundary will lie.”

The key changes to the legislation relate to the “double reasonableness test”. Nearly all the respondents to the consultation expressed concern about this test. The stated purpose of the GAAR is to counteract “tax advantages” arising from “tax arrangements” that are “abusive”. The tests of “tax advantage” and “abusive” both use concepts of reasonableness and this has been referred to as the “double reasonableness test”.

Accountancy Age reported on the 3rd April 2013:

A LACK OF CLEAR DEFINITION within the incoming General Anti-Abuse Rule is likely to cause “considerable uncertainty”, advisers have warned.

The GAAR, designed to catch and prevent contrived tax avoidance schemes, was included in the 2013 Finance Bill and will take effect once it has received Royal assent in July, although many practitioners have been treating it as if it came in on 1 April.

Chair of the House of Lords committee on the Finance Bill Lord MacGregor said : “There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills.

“This is wrong and the government needs to explain that to the public. GAAR is narrowly defined and will only impact on the most abusive of tax avoidance.”

There are other concerns too….

The Institute of Chartered Accountants in England and Wales (ICAEW) has reiterated its criticisms of draft legislation for a General Anti-Avoidance Rule, claiming that the proposed GAAR is confusing and that it could be in breach of international obligations by overriding double taxation treaties.

The ICAEW draws attention to Article 27 of the Vienna Convention, which the UK signed in 1971 and which states that “a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.” ICAEW argues that the GAAR may therefore be unlawful, particularly in the case of around 100 agreements with non-OECD countries.

http://www.tax-news.com/news/UK_Accountants_Warn_On_Legality_Of_General_AntiAvoidance_Rule____60365.html

HMRC will be monitoring for GAAR by:

  1. Reviewing DOTAS (Disclosure of Tax Avoidance Schemes) for abusive schemes, in general DOTAS are reported by the scheme promoter or scheme user – HMRC have a number schemes under the spot light
  2. Intelligence via other sources or disclosure
  3. Records of successfully litigated or settled by agreement GAAR cases
  4. Regular communication with taxpayers and their advisers

DOTAS penalties fall into three categories:

  • Disclosure penalties: apply to failure to disclose a scheme. There are variations in cases where a Tribunal has issued a disclosure order.
  • Information penalties: apply to other failures to comply with DOTAS.
  • User penalties: apply to failure by a scheme user to report a Scheme Reference Number (SRN) to HMRC.

In all cases apart from user penalties (which are up to £1,000) the initial and daily penalty is determined by a Tribunal and could be up to £5,000 per day. Ross Martin have full details on penalties and reasonable excuses.

Its important to note:

Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning.

So will GAAR work? does it need to be clarified so that we can understand it? I am sure we all agree that everyone should pay their fair share of tax but is GAAR the best way to achieve this?

steve@bicknells.net

So what types of tax avoidance are under the HMRC spotlight? 15

As HMRC point out in their Issue Briefing (Sept 2012) Tackling Tax Avoidance

http://www.hmrc.gov.uk/about/briefings/briefing-avoidance.pdf

Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended.

In the 2012 Budget, the Government announced a range of additional measures to close tax loopholes, which will bring in around £1 billion in extra revenue and protect a further £10 billion over the next five years. The Government is also planning to introduce a General Anti-Abuse Rule (GAAR) aimed at deterring and tackling artificial and abusive tax avoidance schemes.

The Disclosure of Tax Avoidance Schemes (DOTAS) rules are a key part of our anti-avoidance strategy and oblige promoters and users of tax avoidance schemes to provide early information to HMRC.

More than 2,000 schemes were identified under DOTAS up to March 2012. This has resulted in more than 60 changes to the law, closing around £12.5 billion in avoidance opportunities.

Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning.

‘Spotlights’ warns you about certain tax avoidance schemes which HM Revenue & Customs (HMRC) thinks you should be aware of. These are just some of the schemes which HMRC believes are being widely offered to help those using them to avoid tax. HMRC is currently improving Spotlights to add more schemes.

http://www.hmrc.gov.uk/avoidance/spotlights.htm

The October 2012 spotlight is Property business loss relief schemes

Previous Spotlights are listed below:

Tax planning to be wary of

  • It sounds too good to be true.
  • Artificial or contrived arrangements are involved.
  • It seems very complex given what you want to do.
  • There are guaranteed returns with apparently no risk.
  • There are secrecy or confidentiality agreements.
  • Upfront fees are payable or the arrangement is on a no win/no fee basis.
  • The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
  • The scheme is said to be approved by HMRC (it does not follow that this is true).
  • Taxation of income is delayed or tax deductions accelerated.
  • Tax benefits are disproportionate to the commercial activity.
  • Offshore companies or trusts are involved for no sound commercial reason.
  • The involvement of professional trustees is claimed to guarantee that the arrangements succeed.
  • A tax haven or banking secrecy country is involved without any sound commercial reason.
  • Tax exempt entities, such as pension funds, are involved inappropriately.
  • It contains exit arrangements designed to sidestep tax consequences.
  • It involves money going in a circle back to where it started.
  • Low risk loans to be paid off by future earnings are involved.
  • The scheme promoter lends the funding needed.
  • There is a requirement to take out insurance against the failure of the tax planning to deliver the tax benefits.

steve@bicknells.net