General anti-abuse rule

The new rule is used to assess whether transactions can reasonably be considered abusive


After much speculation, a general anti-avoidance rule has emerged in Sections 206 to 215 and Schedule 43 of the Finance Act 2013 as the General Anti-Abuse Rule (GAAR)

The rule applies to income tax, corporation tax, capital gains tax, inheritance tax, the new annual tax on enveloped dwellings, petroleum revenue tax and stamp duty land tax, and will be dealt with under the existing penalty regime.

The legislation requires consideration as to whether transactions undertaken by taxpayers can reasonably be considered abusive. Unfortunately, ‘reasonably’ is not defined and is likely to give rise to much contention.

Indicators of abuse are arrangements that ‘cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions’, including whether:

  • the substantive results are consistent with any principles on which those provisions are based
  • the means of achieving those results involves one or more contrived or abnormal steps
  • the arrangements are intended to exploit any shortcomings in those provisions.

Examples of abuse included in the legislation are:

  • arrangements resulting in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes
  • arrangements resulting in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes
  • arrangements that result in a claim for the repayment or crediting of tax that has not been, and is unlikely to be, paid.

If tax arrangements are found to be abusive, the advantages arising from the arrangements are to be counteracted by making adjustments.

The adjustments must be made on a just and reasonable basis, which will depend on the circumstances of the case.

Defining what is reasonable

A matter of concern is that it is left to HMRC to decide what is reasonable.

The only moderating effect is the independent advisory panel, which comprises members drawn from HMRC and at least one independent member.

While the panel does not have the power to bind HMRC, it will provide a non-binding opinion both on the application of the GAAR to the transaction in question and to any counteracting adjustment by HMRC.

Should a case come to court, the burden of proof is on HMRC to prove that the tax arrangements are abusive, rather than for the taxpayer to prove that they are not.

HMRC must also prove that any counteracting adjustments are made on a just and reasonable basis.

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