The new UK GAAR – a journey into the unknown?

24 July 2013. Published by Ben Roberts, Partner

The Finance Bill 2013 received Royal Assent on 17 July. We are now in uncharted territory.

The long-held legal maxim, that "every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be"1 has been "decisively rejected"2.

Arrangements entered into on or after 17 July that have a main purpose of obtaining a tax advantage, and which are "abusive", can be challenged by HMRC under the new general anti-abuse rule ('GAAR').

For the first time, UK tax legislation will attempt to draw a line distinguishing the "centre ground" of reasonable tax planning from abusive, unacceptable tax avoidance. It is an ambitious attempt to make the often grey area of tax avoidance more black and white.

Whether it succeeds, remains to be seen. What is clear is that the GAAR has provoked strong opinions, and no doubt will continue to do so.

How did we get here?

You don't need to be a tax professional these days to recognise that the issue of tax avoidance is high on the agenda of politicians and newspaper editors.

Ever since the tax affairs of a number of well-known celebrities and a certain coffee shop chain, were splashed across the front pages of the national press, it has become commonplace to hear talk of a 'moral responsibility' to pay your 'fair share' of tax.

Such concepts do not sit comfortably with many tax professionals who consider that a person's tax liability should be determined by Parliament. It is, however, impossible to ignore the widespread public perception that wealthy individuals and large corporates are taking advantage of complex tax rules in order to reduce the amount of tax that they might otherwise have to pay.

Perhaps in response to such concerns, the coalition government, in its first Budget, pledged to consider the possibility of a GAAR. Graham Aaronson QC led a study group and a report followed in November 2011 backing the introduction of a "moderate" GAAR. HMRC adopted a number of the study group's recommendations and draft legislation was included in the Finance Bill 2013. HMRC's GAAR Guidance has also been published.3

What will the GAAR catch?

As noted above, the GAAR has been designed to apply to arrangements that have a main purpose of obtaining a tax advantage, and which are "abusive". Both "arrangements" and "tax advantage" are, intentionally, defined widely in the legislation.

A tax advantage will include any benefit, including a relief, repayment, deferral or avoidance of income tax, corporation tax, capital gains tax, inheritance tax or stamp duty land tax. In due course national insurance contributions will also be brought within the scope of the new rules.

Arrangements to obtain VAT and stamp duty savings will not be caught by the GAAR.

The GAAR is intended to be an addition to HMRC's armoury. It takes priority over, but will not replace, other more 'targeted' anti-avoidance rules. HMRC recognise that some tax avoidance arrangements are not "abusive" enough to be caught by the GAAR. However that does not necessarily mean they are acceptable to HMRC.

The real filter for determining whether the GAAR applies is whether the arrangements are "abusive". This is where the fun starts.

Doubly reasonable

Arrangements will be "abusive" if they:

"cannot reasonably be regarded as a reasonable course of action"

This 'double reasonableness' test is quite intentional. It is this aspect of the GAAR that has attracted the most attention (and criticism).

HMRC accept that the tax rules in many cases offer the taxpayer a range of different choices, each with differing tax consequences ("reasonable courses of action").

In applying the double reasonableness test, the question to ask is not simply: was entering into the arrangements a reasonable course of action? Rather, the question is: can there be a reasonably held view that entering into the arrangements was a reasonable course of action?

A tribunal or court considering a case in which HMRC have invoked the GAAR will need to consider the range of reasonable views that could be held.

One of the main criticisms of the GAAR is that this crucial test is highly subjective. In addition to a number of examples discussed in the Guidance, the rules highlight a number of 'indicators' of abusiveness:

  • where the arrangements are intended to exploit shortcomings ('loopholes') in the tax rules;
  • where one or more "contrived or abnormal" steps are involved;
  • where the results are inconsistent with the principles or policy objectives of the tax rules.

Some good news?

There are a number of taxpayer 'safeguards' built into the GAAR legislation and / or reflected in the Guidance. These include:

  • the burden of proof rests upon HMRC, not the taxpayer;
  • HMRC recognise that merely obtaining tax advice is not, in itself, an indication that obtaining a tax advantage was a main purpose of entering into arrangements;
  • the 'double reasonableness' test is itself intended to protect the taxpayer;
  • arrangements designed to fall within statutory reliefs or incentives should in most cases not fall foul of the GAAR, examples include the ISA and 'patent box' rules;
  • arrangements that accord with "established practice", that is accepted by HMRC, should not be affected, examples include 'B share' schemes and use of narrowly-held Eurobonds to avoid UK withholding tax; and
  • an opinion from the GAAR Advisory Panel is needed before HMRC can progress a GAAR case (see below).


The GAAR legislation includes some novel features. Perhaps chief amongst these is the role of the GAAR Advisory Panel. The Panel has two roles:

  • to approve the GAAR Guidance; and
  • to give opinions on specific GAAR cases.

In giving a GAAR opinion, the Panel members must express a view as to whether the particular arrangements were a "reasonable course of action".

This is a single-reasonableness test. If the Panel is unanimous that the arrangements were not reasonable, it is likely that HMRC would seek to rely upon the GAAR.

If the Panel, or indeed any individual member, takes the view that the arrangements were reasonable, HMRC state that it would be unlikely (but not impossible) that they would continue to seek to rely upon the GAAR. This is because the arrangements would not be "abusive", applying the double reasonableness test.

Although HMRC is not to be represented on the Panel, many commentators have questioned whether a Panel funded by, and accountable to, HMRC can be truly independent.

A court or tribunal considering a case in which HMRC seek to rely upon the GAAR must take into account both the Panel-approved Guidance and the Panel's opinion in reaching its decision.

What does the future hold?

The answer to this question very much depends upon how you view the GAAR.

Advocates of the GAAR envisage a future where taxpayers are discouraged from entering into 'abusive' tax avoidance arrangements, but where the centre ground of 'reasonable' tax planning remains unaffected. Whilst there may be some initial uncertainty, they argue that the Guidance will develop into a detailed list of what is (and what is not) caught by the rules. Some supporters of the GAAR have suggested that a simplification of the UK tax system may result as 'targeted' anti-avoidance provisions become redundant and are removed from the statute book.

On the other side of the debate are those who say that the current system, where the tax tribunals and courts are the ultimate arbiter of a person's tax liability, works well and has done so for very many years and there is no need for a Panel to express an opinion in any particular case. The GAAR, in their view, simply adds an additional layer of uncertainty in the dispute resolution process. In this regard, the absence of a GAAR clearance process is disappointing. There is also a concern that 'mission creep' may set in, whereby the GAAR becomes less narrowly focused and its reach extended to 'reasonable' tax planning.

Time will tell whether the GAAR will introduce an element of much needed assurance in the world of tax planning, or whether it will simply compound the existing uncertainty faced by taxpayers when arranging their tax affairs.

1 Lord Tomlin in Duke of Westminster v CIR [1936] AC1.

2 HMRC's GAAR Guidance, paragraph B2.4.

3 With effect from 15 April 2013.

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