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Contractor guide to the General Anti-Abuse Rule (GAAR)

Contractors making tax-planning decisions should take into account the General Anti-Abuse Rule (GAAR), particularly if they are considering joining or investing in a tax avoidance scheme.

James Abbott, owner and head of tax at contractor accountant Abbott Moore, explains: “If a contractor has adopted a particular tax strategy that is subsequently found to be caught by the GAAR. the law will reverse all the tax benefits the contractors would have received as a result of the actions they took. This may leave a contractor facing a hefty bill for back taxes, interest and penalties.”

GAAR was introduced by Chancellor George Osborne as part of a package of anti-avoidance measures in the 2013 Budget. It comes into force in July 2013 when it gains Royal Assent, and will apply to any contractor tax planning and tax avoidance schemes from the point when it becomes law.

Why introduce GAAR?

“If you look at the various tax laws introduced over the years, they have tended to be very targeted,” continues Abbott. “HMRC would become aware of a tax loophole and then put measures into place to stop it.

“So when HMRC has tried to fight tax planning it sees as abusive, it has tried to change existing legislation, or persuaded the Treasury to introduce new laws to tackle the avoidance scheme.”

However, Abbott highlights that HMRC has not always been successful with this ‘catch-up’ approach, and the resulting patchwork of tax law sticking plasters has made the UK tax code one of the most complex in the world.

Hence the need to have a general rule allowing HMRC to attack abusive arrangements in general.

How GAAR works

HMRC has an online resource centre focused solely on GAAR. According to Abbott, GAAR only has eight pages of actual legislation, but 140 pages of guidance created by HMRC on how it should be implemented.

If a contractor has adopted a particular tax strategy that is subsequently found to be caught by the GAAR the law will reverse all the tax benefits the contractors would have received as a result of the actions they took

James Abbott, Abbott Moore

GAAR is intended to apply mainly to corporation and income tax, but also covers capital gains tax and stamp duty. National Insurance Contributions (NICs) will be folded in later in 2013.

Under GAAR, HMRC has two criteria to determine whether a particular tax strategy may be considered abusive:

  1. If it is reasonable to assume that the obtaining of a tax advantage was one of the main purposes (not necessarily the main purpose) of the transactions and;
  2. If entering into the transactions in question cannot reasonably be regarded as a reasonable course of action having regard to the policy behind the legislation, and it contains a contrived or abnormal step.

“In practice, an HMRC officer will decide whether what a contractor did was abusive, and the contractor will be referred to the GAAR Panel, “ says Abbott. “If the panel decides the contractor is caught, they can either accept the decision or appeal to the first tier tax tribunal.”

The panel is made up of tax experts and businesspeople to give it some independence from HMRC.

How GAAR may affect contractors

“The legislation says that HMRC’s guidance must be taken into account when determining whether a particular tax strategy is abusive. Not surprisingly, there is considerable concern amongst the tax community that HMRC has such a big say in the process,” notes Abbott.

He highlights that the word ‘reasonable’ is used many times in the key GAAR criteria above. “In the current climate of anti-avoidance bordering on anti-tax planning, ‘reasonable’ can be a loaded word, open to interpretation.”

GAAR is intended to address the more aggressive and abusive tax avoidance schemes, and not ‘bread and butter’ tax planning. According to Abbott, the typical limited company contractor who is outside an umbrella and on a lower than market rate salary, taking higher dividends, shouldn’t be a target.

GAAR may become a threat to contracting in 5-10 years

But Abbott’s concern is that HMRC has not confirmed that it won’t look at the low salary-high dividends model, especially as GAARs in other tax jurisdictions have been used to attack the limited company contractor model.

Abbott explains: “The GAAR in New Zealand is even more loosely worded than the UK legislation. There it was used by the local revenue to go after two surgeons who had set up a limited company. It successfully reversed the tax savings they had made.”

He points to the tens of millions of pounds of additional tax receipts that HMRC is targeting from GAAR in the coming years: “The real concern is that what is currently considered not to be abusive today may be considered so in five to ten years.

“Contractors may find their accountants saying, ‘What you are doing now is fine, but you need to be aware of this legislation and that HMRC may well use it against you in the future’.”

Ensure tax planning strategies are flexible

Contractors who have a greater appetite for risk and are considering joining tax avoidance schemes should seek professional assistance before taking any decisions, says Abbott. And he urges them to ensure any arrangements they do make are flexible.

“If a contractor is entering into a more aggressive tax avoidance scheme, then GAAR has be considered, and it may be potentially more difficult for some schemes to operate than before,” he says.

“Whatever their choice of tax strategy, contractors should ensure that it is as flexible as possible. If a contractor has chosen a plan that is difficult to ‘unwrap’, it could prove to be very expensive to get out of, if found to be caught by GAAR.”

And Abbott concludes by urging contractors to ensure they have tax investigation insurance: “Without insurance, a contractor runs the risk of having to back down, even if they are in the right, because they cannot afford to fund their defence through the tax tribunals and courts.”

Published: Thursday, 11 April 2013

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