HMRC publishes "more practical" guidance on application of GAAR

The new rule will likely take effect from July 2013, on the date that this year's Finance Bill receives Royal Assent. The GAAR will target artificial and abusive tax avoidance schemes. It will initially apply to the main direct taxes including income tax, corporate tax, capital gains and stamp duty land tax. Separate legislation will be passed to extend the GAAR to cover national insurance contributions at a later date.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that HMRC had addressed many of the criticisms raised by taxpayers in its new draft of the guidance.

"While the introduction of a GAAR is still of questionable value, it is encouraging to see that taxpayers have won some victories over the problems that existed with the draft guidance," she said. "There are still some problems with the GAAR though. The process for establishing whether a scheme falls foul of the GAAR is still very cumbersome, for example."

"The new guidance is much more practical, which is what the business and advisory community cried out for when the incredibly complex draft was first unveiled. The final guidance provides much more clarity for taxpayers on what is and what isn't allowed than the draft," she said.

"There is also a specific warning to taxpayers to 'keep off the grass'. The GAAR makes it clear that where the Government has said it will stop a particular type of scheme, those who try to find ways around the specific rules could be in trouble," she said.

The Interim GAAR Advisory Panel was appointed to approve HMRC's guidance.  It will be succeeded by a permanent Advisory Panel, which will update the guidance and provide opinions on cases where HMRC considers that the GAAR may apply. The Panel is independent of Government, and HMRC will not be represented on the panel. The Government announced in January that Patrick Mears, a former tax lawyer, will chair the panel from 15 April 2013. Graham Aaronson QC, who led an additional study into the need for a GAAR, chaired the interim panel until that date.  The members of the Interim Panel have now stepped down.

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, it will be up to HMRC to prove whether a particular arrangement is abusive, rather than for the taxpayer to prove that it was not. Whether the GAAR will apply is subject to a 'double reasonableness' test as a taxpayer safeguard.

The test requires HMRC to show that the arrangements 'cannot reasonably be regarded as a reasonable course of action'. The test "recognises that there are some arrangements which some people would regard as a reasonable course of action while others would not", the guidance says.

"The 'double reasonableness' test sets a high threshold by asking whether it would be reasonable to hold the view that the arrangement was a reasonable course of action," the guidance says. "The arrangement falls to be treated as abusive only if it would not be reasonable to hold such a view."

The guidance does not prevent HMRC from pursuing arrangements which it regards as seeking to achieve a tax advantage but which cannot be described as abusive through the tribunal system.

Tax expert Heather Self said that although the new guidance was useful, it was not yet clear how the GAAR would interact with specific anti-avoidance rules.

"It will still be a while before the flood of specific anti-avoidance rules dries up," she said. "Until that is the case, taxpayers face the double burden of complying with both the GAAR and existing tax legislation."