New rules aimed at curbing tax evasion come into force over the coming months are the culmination of a process that began in December 2010.
The General Anti-abuse Rule (Gaar) will affect many of us, applying as it does to income tax, capital gains tax (CGT) and inheritance tax (IHT), among others. Working out if your tax arrangements could fall foul of the Gaar will become essential in tax planning, as it may well impact on arrangements previously considered above board. In other words, a lot of people using seemingly legitimate tax schemes could face a nasty shock.
There are two tests to consider when identifying abusive tax arrangements. The first test refers rather generically to “tax arrangements”, which in this instance are defined as the gaining of a tax advantage being a main purpose of the arrangements.
This broad definition means that the Gaar must be considered even when undertaking the most basic tax planning. However, to fall foul of the Gaar, the tax arrangements must also pass the second test: they must be “abusive”.
Within this context, tax arrangements may be considered abusive if they are contrived or if abnormal steps are involved. Examples of abuse are arrangements that:
•Result in income, profits or gains for tax purposes that are significantly less than the true economic income profits or gains;
•Result in deductions or losses of an amount for tax purposes that is significantly greater than the true economic costs or losses; or
•Result in a claim for repayment or credit of tax that has not been and is unlikely ever to be paid.
Worryingly, the legislation provides that tax arrangements which follow established practice or existing published HM Revenue and Customs (HMRC) guidance are only “unlikely” to be considered abusive, which means that even arrangements that either HMRC has accepted in the past, or has actively provided guidance on, could be considered to be abusive.
If tax arrangements are found to be abusive, then the tax advantages that arise from them are to be counteracted by adjustments, and these adjustments must be made by HMRC on a “just and reasonable basis”.
If a case is brought to court, the burden will lie with HMRC to prove that the tax arrangements are abusive, rather than for you to prove that they are not. With most tax enquiries and investigations, you have to prove to HMRC that you are innocent; HMRC does not require to prove that you are guilty, but that will not be the case with the Gaar. HMRC must also be able to prove that any counteracting adjustments are indeed made on a just and reasonable basis.
An independent advisory panel will be set up to provide opinions on the application of the Gaar to a particular transaction and will also provide an opinion in relation to any counteracting adjustments being proposed by HMRC.
The problem is that the advisory panel, which will have members from HMRC and at least one independent member, can only provide a non-binding opinion which, effectively, is not worth the paper on which it is written should HMRC decide to take you to task.
Another weakness is that what is “reasonable” is inevitably a subjective and therefore uncertain test. It is also an emotive matter that can arouse fierce opinion, as we have seen in the press recently.
The major concern over the Gaar is that it is left to HMRC to decide whether something is reasonable or not, and the only check on its powers in this regard, the independent advisory panel, does not have the power to bind HMRC.
It is to be hoped that HMRC will use its powers appropriately to ensure that the Gaar is only invoked in circumstances where there is a clear abuse of the tax provisions; otherwise there will be a lot of very unhappy taxpayers confronting an already over-stretched and under-resourced HMRC.
• Ronnie Ludwig is a partner at Saffery Champness chartered accountants in Edinburgh