The UK’s General Anti-Avoidance Regulations (“GAAR”)

In 2013, HMRC introduced the UK General Anti-Avoidance Regulations (GAAR) in a bid to prevent taxpayers from using tax avoidance schemes. The regulations were created as the result of an independent review led by Graham Aaronson QC, who determined that “the introduction of a targeted rule would deter artificial tax avoidance schemes and contribute to providing a more level playing field for business.”

It covers a wide range of taxes, including income tax, NICs, corporation tax, CGT, IHT, ATED, SDLT, petroleum revenue tax, the apprenticeship levy and diverted profits tax. It does not apply to VAT.

The General Anti-Avoidance Regulations (GAAR) are specific to the UK, based on the specific nuances of the nation’s complex tax legislation. England, Scotland and Wales all have their own GAAR regimes, so care must be applied when relating to businesses that span multiple jurisdictions. The US has similar regulations in place, and the UK regulation sits alongside the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, which aims to reduce tax avoidance from companies that migrate certain elements of their business overseas to lower tax jurisdictions.

Key Provisions of GAAR

GAAR was created to remove any tax advantages that have been gained by an action that is deemed to be abusive. This is determined by the “double reasonableness test” – which refers to arrangements that “cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances”.

Under the GAAR, HMRC has the power to counteract any tax advantage that an individual or business has tried to gain through abusive tax arrangements, such as by amending their tax return, and apply penalties for such behaviour.

Tax advantages covered by the GAAR include relief, repayment, avoiding or reducing charges or assessments, deferring a tax payment or advancing a repayment, and avoiding an obligation to deduct or account for tax.

Impact of GAAR on Businesses

There are safeguards built into the GAAR to put the burden of proof on HMRC: they must use the double reasonableness test to demonstrate that arrangements are abusive, rather than the taxpayer needing to provide proof that they aren’t. Even so, businesses must be careful in their business operations and tax planning to ensure that their actions in terms of tax provisions are “reasonable”.

Business practices affected by GAAR could include anywhere there is a clear tax benefit, and gaining this benefit is deemed to be abusive. This could include postponing or reducing tax liability, for example, or any action specifically taken to avoid an amount of gross revenue being taxable.

For businesses, the GAAR regime requires careful consideration of longer-term corporate financial planning. While there are plenty of legal ways to reduce a company’s tax burden, the complexity of the tax regime means that it can be easy to – whether intentionally or not – commit tax avoidance in the UK. Working alongside a tax professional can ensure that this does not happen.

Case Studies on GAAR Application

The very first ruling of the GAAR regime was published in July 2017, and involved a complex arrangement whereby a company wished to incentivise and reward two employees. However, it wished to do so in a way that it would not be defined as remuneration for tax purposes.

The company purchased gold bullion for the two employees, who immediately sold the gold. In return for a director’s loan account credit in the employees’ favour, the employees settled the company’s liability to pay the third-party gold supplier. Connected to the gold purchase was an agreement that the employees would, in the future, pay their Employee Benefit Trust an amount that was at least equal to the purchase price of the gold.

Since then, further GAAR opinions have included a range of tax avoidance schemes. In 2019, the GAAR panel ruled against a company where shareholders extracted value from a company through gilt options, a second-hand bond, additional contributions plus “cooling off rights”.

In 2018, a company used loans to reward an employee, with the employee’s services received through a third party. The creditor rights were transferred to Employer Financed Retirement Benefit Schemes (EFRBS). These arrangements were determined to have no commercial benefit – the actions were taken simply to reduce the employee’s tax liabilities.

In 2017, a case was heard where the sole owner of a company was indebted to that company. He extracted cash (or the equivalent of cash) from the company, using trusts and trust interests.

Since the GAAR regime was introduced, the legislation has ruled against taxpayers in cases that cover a variety of taxation types. While some of these cases may technically see the taxpayers complying with the letter of the law, they were deemed by the GAAR panel not to respect the intention of Parliament. When considering “creative” tax planning, these nuances must be considered to avoid hefty penalties.

Why Join ICPA for GAAR Guidance?

The GAAR regime is complex – and has undergone a number of revisions since its introduction in 2013. Understanding and navigating these complexities can be a challenge – but at the ICPA, we’re here to help.

Our members benefit from access to a variety of services and support that can assist in dealing with GAAR and tax avoidance in the UK. These include full access to Tolley’s Tax Library (a significant expense if standalone access is purchased), as well as our telephone helplines, staffed by seasoned accounting professionals.

We also host regular networking and professional development opportunities relating to GAAR expertise, along with a range of other topics. If you’d like to learn more about ICPA membership, contact a member of our team.

FAQs on GAAR

What is the role of the GAAR Advisory Panel?

The GAAR Advisory Panel is independent from HMRC. The Panel was set up to approve HMRC guidance and to offer opinions on cases in which HMRC believes GAAR may apply.

Can you provide examples of schemes considered abusive under GAAR?

Examples of schemes considered abusive under GAAR include a 2017 case where the sole owner of a company was indebted to that company. He extracted cash (or the equivalent of cash) from the company, using trusts and trust interests.

What steps should taxpayers take to ensure compliance with GAAR?

Taxpayers should familiarise themselves with the GAAR and avoid entering into any agreements that could be deemed by HMRC to be intentionally abusive. To ensure compliance, we recommend working alongside a tax professional.

What are the penalties for arrangements found to be abusive under GAAR?

HMRC can impose 60% penalty charges on taxpayers who use schemes found to go against the GAAR.

What guidance is available for understanding GAAR applications?

Detailed GAAR guidance can be found on the Government website. ICPA members also benefit from access to Tolley’s Tax Library and other resources that can help.