Tax avoidance is described as a threat to our society, our way of life and the principle of altruism that exists in most democratic societies.
However, it is a necessary principle of the economic marketplace that companies and businesses should act within the law and accordingly, where they manage their tax affairs in accordance with legal principles, are entitled to seek tax savings where permissible.
This ongoing balance between the necessity to prohibit tax avoidance yet permit the taxpayer to adopt tax planning strategies has led the UK government to amend tax legislation almost annually in response to various tax schemes emerging, with reactive approaches seeking to counter the use of such schemes seeking to disguise remuneration.
This has led to the General Anti-Abuse Rule (“GAAR”) which was introduced in the Finance Act 2013, to deal with “tax advantages arising from tax arrangements that are abusive”.
How does GAAR Work?
GAAR is engaged where an arrangement exists which gives a “tax advantage”. It is only applicable to arrangements entered into from July 2013, although this does not excuse arrangements which may fall within other tax regulations as disguised remuneration.
GAAR is not designed to cover circumstances where individuals or companies make decisions as to how to arrange their affairs, for example a sole trader working through a company (although this may fall within the disguised employment restrictions under IR35). However GAAR targets any arrangements which:
- have the sole or dominant purpose of obtaining a tax advantage;
- are abusive.
The key criterion is whether the arrangement is unreasonable or abusive. HMRC accept that many arrangements will not fall within GAAR if they do not satisfy both of the above tests, although this is usually an objective assessment and will not depend on you/your company’s personal circumstances, but rather what is consider unreasonable.
Accordingly, the principle cited above – that all companies and individuals are entitled to arrange their tax affairs in whatever manner to mitigate tax – appears to have been diluted following the introduction of GAAR, to only that which can be considered reasonable.
That aside, and as also described above, where a decision is reasonable or not abusive, it will not fall within this rule (although it could fall within other rules on Disguised Remuneration).
Who is responsible for policing GAAR?
The taxpayer has the responsibility to disclose the details of any such arrangements and there is no separate policing of tax schemes generally, which would be costly and administratively impossible. However, where an individual or company considers it has participated in any such arrangement which could fall within GAAR, the DOTAs will be the appropriate forum for disclosure of such arrangements.
Where disclosure is made, and HMRC considers that GAAR may apply, a panel exists (the GAAR Panel) to decide upon any such disputes between HMRC and the taxpayer.
What are the penalties under GAAR?
Under legislation introduced in 2014, an Accelerated Payment Notice (“APN”) may become payable in certain circumstances where HMRC consider that an arrangement falls within GAAR or where negotiations are ongoing.
- for arrangements entered into after September 2016, where the arrangement is disclosed to HMRC and the taxpayer has not taken the appropriate corrective action, a penalty equal to 60% of the tax advantage may be imposed;
- for arrangements entered into between July 2013 and September 2016, HMRC has responsibility for assessing the penalty;
- in addition, where such an arrangement is considered to fall within GAAR, there will be the tax due and unpaid as a result of the arrangement, which HMRC will also calculate, together with any further taxes (and penalties) that may arise as a result of any tax investigations commenced as a result.
At Francis Wilks & Jones we are able to assist with negotiating any claims arising from HMRC for enforcement of such liabilities against you or your company, and certainly in respect of APNs, negotiated settlements, tax disputes, Statutory Demands and bankruptcy and winding-up petitions. Please call any member of our tax disputes team for help.