Tax general anti-abuse rule now in force as Finance Act receives Royal Assent

Out-Law News | 18 Jul 2013 | 2:53 pm | 1 min. read

The new general anti-abuse rule (GAAR) is now in force, preventing artificial and abusive tax avoidance schemes that fail to pass a 'double reasonableness' test.

The GAAR forms part of this year's Finance Act, which received Royal Assent yesterday. It will initially apply to the main direct taxes including income tax, corporate tax, capital gains and stamp duty land tax. The Government has proposed the introduction of a similar rule for national insurance contributions (NICs) as part of a new National Insurance Contributions Bill, which will be introduced to Parliament in the autumn.

"The GAAR is now 'law', and tax advisers will have to apply it," said tax expert James Bullock of Pinsent Masons, the law firm behind Out-Law.com. "Taxpayers will ultimately run the risk of penalties if their tax advisers do not apply the new rules, since if the GAAR is ultimately found to have applied to a particular transaction, a tax return where it has not been applied is technically wrong."

The stated purpose of the GAAR is to prevent taxpayers from receiving "tax advantages" as a result of "tax arrangements" that are "abusive". According to the legislation, whether a particular arrangement is abusive will be a matter for HM Revenue and Customs (HMRC) to prove, rather than the taxpayer having to prove that it was not.

Whether the GAAR will apply will be subject to a 'double reasonableness' test as a taxpayer safeguard. This test requires HMRC to show that the arrangements "cannot reasonably be regarded as a reasonable course of action". HMRC will not be prevented by the new rule from pursuing arrangements which it regards as seeking to achieve a tax advantage but which cannot be described as abusive through the tribunal system.

A GAAR Advisory Panel will be appointed shortly to oversee HMRC guidance on the application of the GAAR and to provide non-binding opinions on cases where HMRC considers that the GAAR may apply. The panel will be independent of Government, and will not include representatives from HMRC. An interim advisory panel chaired by Graham Aaronson QC, who led an additional study into the need for a GAAR, was set up in November 2012 to approve initial guidance on the application of the rule. This guidance was finalised in April.

Tax expert James Bullock said that this guidance would likely be of "great significance" in the short term, as "there is unlikely to be any published decision by the Advisory Panel until 2015, and probably no Tribunal decision until 2016 at least".