The General Anti-Abuse Rule – Why Exotic Tax Models are a Bad Idea

As a responsible voice in the world of contracting, we often warn against “abusive” tax arrangements, and usually we’ll include words like “avoidance”, “evasion” and “serious consequences” to let you know that we mean business and are not at all amused. We do this out of genuine concern, because it really is difficult to overstate the damage that can be done if you get involved with the wrong company or follow the wrong advice.

We have warned against entering into “abusive arrangements” many times, but with the exception of disguised remuneration schemes we haven’t really examined what HMRC mean by “abuse”.

To that end this article will look at their guidance on the GAAR, or General Anti Abuse Rule, and what it means for anyone who might be about to dip anything important into the murky waters of tax avoidance.

What is the General Anti-Abuse Rule?

The GAAR attempts to establish the principle that tax payers should “pay their fair share” and rejects the idea that they should be free to use their ingenuity to reduce their tax bills by any lawful means. To quote HMRC’s guidance, “Taxation is not to be treated as a game where taxpayers can indulge in inventive schemes in order to eliminate or reduce their tax liability.”

With this in mind, the GAAR gives HMRC the power to counteract any tax advantages that people try to gain by using abusive tax arrangements, even where those arrangements are not specifically prohibited by other existing tax laws.

Amendments to the GAAR in 2015 introduced penalties for people who entered into abusive tax arrangements on or after 15 September 2015.

The Double Reasonableness Test

HMRC define a “tax arrangement” as one where the main purpose, or one of the main purposes, is to obtain a tax advantage. If such arrangements “can’t reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions” then they constitute abuse, and the GAAR may be employed to counteract any advantage gained.

If you’re frowning at the phrase “reasonably be regarded as reasonable” you’re not alone. As if to make up for brutally torturing an innocent sentence in this way, HMRC have included a list of things that may be taken into account when applying their “double reasonableness test”.

  • The principles and policy objectives of the tax provisions in question.
  • Whether the results of the arrangements are consistent with these principles.
  • Whether the arrangements involve contrived or abnormal steps.
  • Whether the arrangements are intended to exploit shortcomings in the tax provisions.
  • Whether the arrangements produce a tax loss which is significantly greater than the economic loss, or a taxable profit or gain that is significantly smaller than the economic profit or gain.
  • Whether the arrangements enable a claim for a repayment or credit for tax that has not been paid.
  • Whether the arrangements are consistent with established practice that has been accepted by HMRC.

These points go some way to explaining the kind of arrangements the rule is intended to tackle, but they do still leave quite a bit of room for interpretation. What may appear “contrived” or “abnormal” to HMRC may not look that way to you.

How far is too far?

HMRC acknowledge that sometimes you may have a choice about how you operate, that those choices may produce different tax outcomes and that your decision might be based on those outcomes (for example, you might choose to trade through a limited company rather than as a sole trader because of the tax advantages). This is reasonable and acceptable behaviour.

It is equally clear that “contrived or abnormal” arrangements intended to reduce your tax bill are not allowed (for example taking part of your pay as a loan when no-one expects it to be repaid). Unfortunately, it’s more difficult to define a point at which a course of action ceases to be a “sensible decision” and becomes “contrived and abnormal”.

How to protect yourself

If you’re considering entering into an arrangement that is designed to reduce your tax, particularly if it involves steps that would otherwise make no sense, you should seek advice from an expert that you trust before going ahead. If you’re left in any doubt at all, we’d advise you not to get involved.

As a contractor, you should make sure your accountant or umbrella company is an FCSA Accredited Member, which will mean you can trust their advice and have confidence that they won’t involve you in any risky tax avoidance schemes.

If you have questions about this or any issue, or if Orange Genie can help in any way, please contact our expert team on 01296 468483 or email info@orangegenie.com.

 

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