Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said, "Deferring the start date until Royal Assent is sensible - there is already a risk of the GAAR creating uncertainty, so waiting a few more months until the legislation has passed through parliament is a good idea."
Following consultation, a number of amendments have been made to the draft legislation to reflect the comments received. In addition HMRC's draft guidance on the GAAR rules has been published.
"The guidance is more comprehensive than expected and it is good to see that it contains practical examples," said Heather Self. "However, many of the examples are complex and contrived - we need more examples of 'normal' tax planning, to help show where the boundary will lie."
The key changes to the legislation relate to the “double reasonableness test”. Nearly all the respondents to the consultation expressed concern about this test. The stated purpose of the GAAR is to counteract “tax advantages” arising from “tax arrangements” that are “abusive”. The tests of "tax advantage" and "abusive" both use concepts of reasonableness and this has been referred to as the "double reasonableness test".
"Tax advantages" is widely defined and looks at whether it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements. This is then narrowed by the abusive test which covers "arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action".
The Government has made changes to the draft legislation in an attempt to address concerns about this test. The changes include clarification of the circumstances to be taken into account in determining whether arrangements are abusive and the inclusion of an additional indicator that arrangements may not be abusive where they are in accord with established practice and HMRC has indicated its acceptance of that practice. In addition the draft legislation has been amended so that it no longer highlights transactions or agreements that include non-commercial terms as one of the indicators of abusiveness.
Almost a third of the responders to the consultation had suggested that inheritance tax should not be covered by a GAAR, according to the consultation response document. This states that although the Government recognises that "IHT has a number of differences when compared to the other direct taxes and has complex interactions with trust and estates legislation", it will still be covered by the GAAR as excluding it "would leave IHT potentially exposed to abusive avoidance schemes."
However, the Government proposes that the GAAR will not apply to tax arrangements that have already been entered into before royal assent to the Finance Bill and believes that this should address some of the concerns about including inheritance tax, some of which focused around the fact that IHT planning is often entered into many years before the IHT liability arises.
Heather Self said that the commencement rules for the GAAR "are clear and take away some of the fear of the GAAR reaching back in time".
The legislation also sets out how the GAAR Advisory panel will operate. Heather Self said that the advisory panel process "is intended as a safeguard but looks as if it will be burdensome and take a long time". "Can a taxpayer opt out and go straight to the Tribunal?" she aked.
The GAAR Advisory Panel will give opinions on specific cases and approve the HMRC guidance on the operation of the GAAR. It was confirmed in November that HMRC will not be represented on the Advisory Panel and Graham Aaronson QC will chair an interim advisory group to monitor the progress of the guidance ahead of the appointment of a permanent advisory chair in January.
It is now expected that the opinions of the Advisory Panel will be published in anonymised form. Heather Self said that this was a "welcome development", which would "help taxpayers understand the scope of the GAAR".
In December 2010 the Exchequer Secretary to the Treasury, David Gauke, asked Graham Aaronson QC to lead a study that would consider whether a general anti-avoidance rule for the UK could deter and counter tax avoidance. The study group report was published on 21 November 2011 and recommended the introduction into the UK tax system of a narrowly focused General Anti- Abuse Rule (GAAR). The Government announced in the 2012 Budget that it would accept this recommendation.
The GAAR will initially apply to income tax; corporation tax capital gains tax; petroleum revenue tax; inheritance tax; and stamp duty land tax and the new property annual charge. It is intended that the GAAR will also apply to national Insurance contributions, but this will require separate legislation and this is likely to be enacted after the GAAR has been introduced.
The Finance Bill 2013 is likely to receive royal assent sometime in July 2013.
Other tax legislation published in draft today includes some changes to the "worldwide debt cap" legislation and some further small changes to the controlled foreign company (CFC) rules to ensure they "work as intended, and to counter two tax planning opportunities".
Tax expert Eloise Walker at Pinsent Masons commented, “It’s amusing to see the triumph of mediocrity that some of the international tax changes in the Finance Bill reflect. We’ve got amendments to the worldwide debt cap – a piece of legislation so badly drafted HMRC have been trying to fix it ever since before it became law. Then we’ve got the new CFC rules – already being amended in the draft Finance Bill 2013, and they’ve not even commenced yet."
The "worldwide debt cap" rules restrict corporation tax deductions for interest and other finance expenses claimed by members of a large group, by reference to the group's consolidated finance costs. The debt cap rules apply for periods of account beginning on or after 1 January 2010.
The new CFC rules govern when the profits of foreign companies controlled from the UK are subject to UK tax. They will apply to companies with accounting periods beginning on or after 1 January 2013,
A new piece of legislation is also proposed which will enable companies to elect to defer the payment of exit charges when they cease to be resident in the UK. Exit charges are corporation tax charges that arise on certain unrealised profits and gains when a company ceases to be tax resident in the UK.
Eloise Walker said that the Government was "bowing to the Court of Justice of the European Union and nobly allowing the deferral of paying exit taxes when a UK company, sick of the uncertainty and muddled tax regime in the UK, moves it’s tax residence to elsewhere in the EU". However, she added that it would "be first time ever if the draft legislation is EU compliant.”
The Government has also announced that it has decided to amend the group relief rules in order to conform to the recent CJEU ruling in Philips Electronics UK Ltd and to "ensure that losses are not relieved twice, once as group relief in the UK and then again in another country". The amendments will prevent a non-UK resident company that is resident in the EEA from surrendering group relief for a loss or other amount attributable to its UK permanent establishment to the extent that it is relieved against the non-UK profits of any person in any period.