New rules aimed at clamping down on those who mitigate their tax bills can expect to see the courts throw out contrived schemes seeking to undermine the rules.
The new General Anti-Avoidance Rule (GAAR) has been written in simple terms for use in courts and tax tribunals by HM Revenue and Customs (HMRC) and gives details of what arbiters should consider when hearing a case.
More importantly for judges and lawyers, the new GAAR flatly rejects previous court judgments which were allowed to stand because the tax avoidance which had taken place was within law.
The report states tax is not a game that lets taxpayers invent ‘ingenious’ schemes to save money by twisting the meaning of the rules.
GAAR now puts in place a statutory limit for when the taxpayer goes beyond what can be reasonably regarded as being a reasonable course of action.
Double reasonable test
Known as the ‘double reasonable’ test, it is defined by HMRC as being a safeguard to ensure that the taxpayer is allowed the benefit of reasonable doubt.
However, the burden of proof in any case remains with HMRC and the guidance promises that any adjustments will be ‘just and reasonable’ and will not lead to double taxation.
Before GAAR can be applied to a case, HMRC that needs to get consent from an independent advisory panel.
When it comes to applying it to self-assessment cases, additional penalties may be applied should the decision be that an arrangement was ‘obvious’ and abusive.
There are four sections of advice which have been approved by the interim GAAR Advisory Panel and these will now be used by the courts from July.
GAAR and tax
GAAR now applies to income tax, inheritance tax, capital gains tax, stamp duty land tax, petrol duty and the annual tax on homes owned by companies.
The new rules also apply to corporation tax, although the situation is legally different when applying GAAR to cases involving National Insurance Contributions. These details will be published later.
Heather Self, of law firm Pinsent Masons, says the new GAAR is still cumbersome, especially when defining whether a scheme has fallen foul of the rules.
She added: “The new guidance is more practical and provides clarity for taxpayers on what is and isn’t allowed, but there is also a specific warning to taxpayers to ‘keep off the grass’.
“GAAR is clear that when the government says it will stop a particular type of scheme than those who find ways around the rules could be in trouble.”
Read more about GAAR on the HMRC website: https://www.hmrc.gov.uk/avoidance/gaar.htm
