This helpsheet provides further guidance on the application of the Fundamental Principles and Standards covering the application of the GAAR and what happens of HMRC challenge an arrangement.
HMRC’s GAAR Guidance Tax avoidance: General Anti-Abuse Rule - Publications - GOV.UK provides a detailed articulation of what HMRC consider to be reasonable planning through to abusive arrangements, with extensive examples. A key message is in B2.1:
'the GAAR ……...rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position.'
Clearly where the GAAR applies, the arrangements will be ineffective (and counteracted by HMRC) and the client should be advised accordingly.
A member should ensure that he is aware of the scope and potential application of the GAAR. He should put appropriate measures in place commensurate with the size of their practice or business and the extent to which he is involved in areas where the GAAR will need to be considered. Measures which may be considered include:
- Technical briefing or guidance material linking to and potentially supplementing HMRC’s GAAR Guidance.
- Protocols to ensure the quality and consistency of treatment. If a member is unsure or does not have the expertise to advise he may wish to seek specialist input or refer the client to a specialist adviser.
- Raising awareness with clients or internally in the business, especially for those whose affairs may be more complex or who may undertake planning with other advisers.
- Caveat advice to explain that the GAAR is new with no precedent (or little precedent as some precedents begin to emerge) and given this uncertainty the member cannot guarantee that it will not be applied.
- Transmittal letters for returns might refer to the GAAR for clients whose affairs may be more complex or who may undertake planning with other advisers.
- Updating knowledge materials to ensure that they refer to the GAAR where appropriate.
- Reviewing any existing offerings which might be affected by the GAAR.
- Monitoring output of the GAAR panel.
Even if the member concludes that the GAAR is not expected to apply, the member should advise on the other issues identified in Tax advice as applicable (see final paragraph in the Practical considerations section).
A member should note the application of the GAAR to compliance work.
From April 2015 a General Anti- Avoidance Rule will apply in Scotland to land and buildings transactions and landfill tax. Differences in drafting and parliamentary intent means the legislative provisions should be consulted before proceeding in those areas.
What happens if an arrangement is challenged under the GAAR?
Where HMRC wishes to challenge a transaction under the GAAR they must refer the arrangement to the Independent Advisory Panel where the case is heard by a sub-panel of three.
Where arrangements are referred to the GAAR Advisory Panel and the joint opinion of the panel, or the opinion of two or more members of the panel, is that the arrangements are not ‘a reasonable course of action’ the promoter who has promoted the arrangements will meet a threshold condition for the purposes of the Promoters of Tax Avoidance Schemes (POTAS) regime. See DOTAS and POTAS. If HMRC considers the meeting of this threshold to be significant it must issue a conduct notice to the member unless it is considered inappropriate to do so bearing in mind the impact that the member’s activities as a promoter are likely to have on the collection of tax.
If HMRC issue a counteraction notice under the GAAR in relation to the transaction, an Accelerated Payment Notice may also be issued. This will potentially result in the taxpayer having to pay the disputed tax (or part of it) in advance of any resolution through the court system. It should be noted that even if the GAAR Advisory panel consider the transaction to be a ‘reasonable course of action’ HMRC can still pursue a counteraction notice.
Where an arrangement is successfully challenged under the GAAR then this is an ‘occasion of non-compliance’ for the Government’s Procurement Policy purposes and may affect the ability of the taxpayer concerned to bid for certain Government contracts.
A member should consider the potential reputational and financial impact on their clients and on their own business of promoting arrangements that could be referred to the GAAR Advisory Panel or successfully counteracted under the GAAR. A member should ensure that clients are aware of all the consequences.