Practical implications of a GAAR

THE CHANCELLOR in his March Budget Statement confirmed that the government is proceeding with proposals to introduce a general anti-avoidance rule (a GAAR) following the report from Graham Aaronson QC of 11 November 2011. The concept of a GAAR is not new.

This has been proposed on two previous occasions, but on each occasion was not taken forwards. This was due to concerns on complexity and also the cost of implementation.

Proposed GAAR
The draft clauses published in the Aaronson report are in themselves potentially of broad application and may give rise to significant uncertainty. Broadly, the GAAR will apply where there are “abnormal arrangements” which achieve an “abusive tax result” that are contrived to achieve such a result.

An abusive tax result is an advantageous tax result that is neither reasonable tax planning nor an arrangement without tax intent.

It might be thought that the carve-out for reasonable tax planning would limit the GAAR in a clear and acceptable way. This may not be the case. Section 4 of the draft clauses provides that an arrangement does not achieve an abusive tax result if it can reasonably be regarded as a reasonable exercise of choices of conduct afforded by the provisions of the Tax Acts. But this definition does not really take one much further.

The draft clauses contain presumptions in favour of the taxpayer. Nonetheless there is likely to be significant uncertainty if the draft clauses are implemented in their current form.

It is likely that significant guidance will be required from HMRC. The difficulty with guidance is that it is a matter of judgement and not legally binding. Taxpayers may have difficulty in knowing for certain whether a particular arrangement will be accepted as coming within a particular aspect of the guidance.

Practical implications for the private client
The Aaronson report and the draft clauses seem to adopt a corporate approach to tax avoidance. Implications for private clients in particular will be far reaching and the lack of certainty may inhibit many arrangements which are currently felt to be part of everyday planning. The following may be examples of arrangements that may be questionable.

A person coming to the UK may realise gains prior to becoming UK resident. Disposals of assets may be brought forward to realise gains or rebasing assets in the tax year prior to becoming UK resident. This might be achieved, for example by transferring assets to a wholly-owned company or a sale to a trust set up for the benefit of the vendor, the action being taken in the year prior to becoming UK resident.

A businessman who transfers his business to a company which then carries on the business and pays the owner a salary. Income retained within the company bears tax at a lower rate, even after taking into account National Insurance, than would have been paid by the businessman if he had carried on trading directly as an individual. This may occur in many cases and not only where the shareholder’s personal services are hired out by the company. Will this be caught by the GAAR and will the shareholder have to demonstrate to HMRC that his motivation was not tax avoidance in order to escape the GAAR? Or even if there was a tax motive for the transfer of the business to the company will this be fatal anyway?

The transfer of assets from spouse to spouse in order to allow the transferee spouse to be taxed at a lower rate than the transferor spouse may be called into question.

Specific anti-avoidance rules
The aim would be, in order to simplify the tax system as a whole, to repeal specific anti-avoidance rules. They would be unnecessary if the GAAR is effective to do what it is designed to do. The government should be asked to look at a speedy review and repeal of specific anti-avoidance rules if a GAAR is put in place.

It would be extremely onerous on taxpayers to have to consider both the anti-avoidance rules and a GAAR in combination. It is hoped that the government will look at this sympathetically.

The government has announced a consultation on a GAAR and, while it seems likely that a GAAR will in fact be introduced, it is hoped that it will be sufficiently clearly delineated so as not to cause great uncertainty. There seems a particular risk that this would be the case for private clients in their day-to-day routine arrangements.

Owen Clutton is a consultant in private client services at Macfarlanes