This article is by Laurence Field, and Tim Norkett, head of private clients, Crowe Clark Whitehill, the UK-based audit and tax service. They write about the UK’s recently enacted General Anti-Abuse Rule, part of measures to stem supposedly artificial tax avoidance.

Editor’s note: This
article, by Laurence Field, and Tim Norkett of Crowe
Clark Whitehill, the UK-based audit and tax service, examines the UK’s
recently enacted General Anti-Abuse Rule, part of measures to stem supposedly
artificial tax avoidance. The rule raises a series of questions about whether
it is so vague as to allow considerable – and possibly dangerous - discretion
to the authorities about whether a practice is, or is not, “abusive” in some
way. The authors of the report examine the basic issues.

The General Anti-Abuse Rule is here. Like it or lump it, taxpayers
are going to have to deal with it. 

The GAAR has huge expectations heaped upon it. The tax
affairs of companies and individuals have regularly made the front pages of
newspapers recently.  Starbucks, Amazon,
Google, Jimmy Carr [the comedian] have all found themselves under intense scrutiny
from both the media and Parliament itself. Will the GAAR put an end to all
these controversies?  Maybe, but probably
not.

Guidance published by HM Revenue and Customs in April this
year seems set to dampen expectations and provide more certainty about the
rule’s scope. Its remit will not extend beyond the UK and will focus on stopping
highly contrived arrangements. The tax affairs of multinationals will continue
to be governed by multilateral treaties, meaning that much of the planning that
has so outraged the media and the House of Commons Public Accounts Committee
will be unaffected.

The GAAR guidelines do, however, lay down some markers. Tax is not a game and the guidelines reject the idea “that taxpayers
are free to use their ingenuity to reduce tax bills by any lawful means”. Out goes
structuring that “produces a tax result clearly contrary to the intended consequences of the law”. For
example, this affects some trust planning to avoid national insurance contributions.

The GAAR indicates it is acceptable to include tax as part of the
commercial consideration – tax-efficient debt financing rather than equity financing is an
“entirely reasonable” choice to make. It’s also acceptable to think through the tax implications when
deciding on whether to be an employee, self-employed, a partner or trade as a company.

A fundamental
principle of the new rule is that tax payers are allowed to choose. Transactions
can be carried out in different ways with different tax outcomes. Choosing is
only an issue if
the choice made is "abusive" or designed to exploit legislative failures.

Anything contrived or abnormal will attract attention under the GAAR. This
means things like circular cash flows, transferring
assets to contrived related parties for Stamp Duty Land Tax purposes, using
commodities to avoid national insurance contribution charges, and finding ways to
allow UK
domiciliaries to buy interests in excluded property trusts for inheritance tax
purposes.

Following established practice and arranging matters to fall within a
particular statute is acceptable.  Thus ensuring a
loan note qualifies as a non-QCB, use of gift and loan trusts for inheritance tax, granting an option rather than making an immediate
sale to defer capital gains tax or a principle private residence election are all acceptable. There is a
caveat – any “contrivance” will be frowned upon.

So will the GAAR help? The guidance suggests it will stop some of the more extreme abuses of
the tax system. It is certainly not designed to stop sensible planning for
genuine transactions carried out in a commercial way. It won’t, however, take
tax off the front page of the newspapers, because its remit is not, and could never
be, wide enough to deal with the tax affairs of global businesses.