Following the Budget 2012 announcement that a general anti-abuse rule (GAAR) would be introduced next year as part of the Government's firm commitment to tackling tax avoidance, HMRC has launched a formal consultation together with draft legislation.
In December 2010, David Gauke, Exchequer Secretary, asked Graham Aaronson, QC, to conduct an independent study to consider whether a general rule could deter and counter tax avoidance, whilst retaining a tax regime that is attractive to businesses. The rule would have to provide sufficient certainty about the tax treatment of transactions without giving rise to undue costs to both businesses and HMRC.
Graham Aaraonson concluded that a GAAR would deter artificial tax avoidance schemes that can only be regarded as wholly unacceptable and that it would help provide a more level playing field for business. The Government accepted this conclusion and also agreed that a “broad spectrum” anti-avoidance rule would not be beneficial for the tax system as it would compromise the certainty that is vital to providing the confidence to do business in the UK.
The proposed GAAR will apply to income tax, corporation tax, capital gains tax, NIC and petroleum revenue tax but will be extended to cover stamp duty land tax and inheritance tax. VAT will be excluded because of the difficulties it presents in its interaction with abuse law.
In determining whether or not a tax avoidance scheme is artificial the GAAR will operate by applying a 'main or one of the main purposes' test. It will, however, recognise that incidental steps taken to minimise tax liability in arrangements will not usually equate to a main purpose.
Tax arrangements will be considered abusive if they are arrangements which cannot be reasonably be regarded as a reasonable course of action, having regard to all the circumstances including:
- the relevant tax provisions,
- the substantive results of the arrangements, and
- any other arrangements of which the arrangements form part.
Each of the following will be an indication that tax arrangements might be abusive:
- the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes,
- the arrangements result in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes,
- the arrangements result in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid,
- the arrangements involve a transaction or agreement the consideration for which is an amount or value significantly different from market value or which otherwise contains non-commercial terms.
Consultation period closes on 14th September2012.
Over the years to come the courts could well be busy in deliberating as to what is and what is not caught by the rule.
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