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On 17th July 2013, the Government introduced the General Anti-Abuse Rule. It was introduced as part of an approach by the Government to tackle tax avoidance. The GAAR legislation is used to define abusive tax arrangements, although HMRC also uses other strategies to fight against tax avoidance.

What is tax avoidance?

Tax avoidance is the practice of exploiting legislation to reduce the amount of tax payable, even though the legislation wasn’t intended for this purpose. Tax planning is the legitimate method used to reduce the amount of tax outstanding, using tax legislation as it was originally intended. For instance, putting money aside in an ISA, where you can earn interest on savings that is tax free.

What is GAAR?

GAAR is used primarily to prevent taxpayers from joining arrangements that abuse tax legislation. It is also used to prevent the promotion of arrangements that abuse the rules. Although there are many legitimate ways to reduce the tax paid, GAAR will target those who exploit tax loopholes and deliberately set up a contrived arrangement with the sole purpose of avoiding payment of tax. To decide whether arrangements are an abuse of the tax laws and fall within GAAR, HMRC will check whether the arrangements would constitute tax avoidance under rules that are separate from GAAR.

The General Anti-Abuse Rule applies to various taxes, including Income Tax, Inheritance Tax, Stamp Duty Land Tax, Corporation Tax and Capital Gains Tax, among others. If a taxpayer sets out to get a tax result that is favourable, but was not originally intended when the legislation was introduced, GAAR could be brought into operation.

 
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GAAR and the taxpayer

Safeguards were introduced with the legislation to give the taxpayer benefit of reasonable doubt when aiming to establish whether an arrangement is an abuse of the rules, which means HMRC is responsible for establishing that an arrangement is abusive, rather than a taxpayer having to prove that it is non-abusive.

HMRC has to apply a “double reasonableness test” which examines whether it is realistic to believe that the arrangement was a reasonable course of action. If it is considered not realistic to believe that the arrangement was reasonable, the scheme won’t fall under GAAR.

An advisory panel has to be consulted by HMRC to determine whether an arrangement is deemed to have been a reasonable course of action.

GAAR is extremely complex and rather than risk falling foul of HMRC’s rules, it is advisable to consult a professional.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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