In July 2013, the UK introduced a new General Anti-Abuse Rule (GAAR) – a statutory rule that allows HMRC to counter abusive tax schemes. HMRC’s guidance on the GAAR, all 195 pages of it, makes it clear that the GAAR targets the three As – abusive avoidance arrangements (in this topic, it’s definitely the case that the As have it). The critical hallmarks of abuse given by the guidance are that the tax advantages obtained under the arrangements were not intended by Parliament and that the arrangements “cannot reasonably be regarded as reasonable”.
HMRC see the GAAR as a game changer and we are expecting HMRC to use it actively against aggressive tax planning in future, including in relation to planning to avoid income tax and national insurance contributions on pay and bonuses. The GAAR does not apply retrospectively to planning undertaken before July but a recent decision of the tax tribunal shows its influence on the approach taken to older schemes.
In LM Ferro Limited v HMRC pharmacy owner Mr Ferro received an award worth £300,000 in the form of shares in a special purpose vehicle company under a scheme. If the scheme worked, no income tax or national insurance contributions were payable when he cashed in the award. The tax tribunal decided that the scheme did not work and that at bottom the award was effectively a cash bonus.
Although the case pre-dates the GAAR, an argument was advanced on behalf of the company based on the principles of the then-proposed GAAR. This was rejected by the tribunal as being irrelevant – it should not affect the views of the tribunal as to what the purpose of particular legislation is. However, the tribunal’s decision contains several references to principles that appear in the HMRC guidance, such as “a contrived and artificial scheme to avoid tax”, “the steps … disclose no commercial purpose” and “the transaction when viewed realistically is one which it was the intention of Parliament to exclude from [part of the legislation relating to earnings]”.
So the take-home message is, as HMRC says on its GAAR webpage, “If you are offered a way to pay less tax that sounds too good to be true, it probably is.”