Guest Comment: Will The UK's General Anti-Abuse Rule Do What It Claims?

Laurence Field and Tim Norkett

Crowe Clark Whitehill

8 May 2013

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 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.