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GAAR – Treasury clampdown on tax avoidance schemes

The Treasury has published a consultation document on the introduction of a General Anti-Abuse Rule (GAAR) which will target specific tax avoidance schemes, some of which may be used by professional contractors.

Following George Osborne’s announcement in Budget 2012, the 14 week consultation into the GAAR has now opened, and invites comments from interested parties into how the proposed legislation will work in practice. The consultation period ends on 14th September.

History of the GAAR

As part of the Government’s well-publicised efforts to tackle tax abuse, in late 2010 Graham Aaronson QC was hired to carry out an independent study to see whether a wide-ranging GAAR would be successful in deterring the use tax avoidance schemes, without damaging the attractiveness of UK’s tax system to businesses.

Aaronson concluded that a targeted GAAR aimed at specific ‘abusive arrangements’ would be a more beneficial aim that the creation of a broad-based GAAR – which could harm the UK tax system.

The Government took on board this recommendation, and aim to put in place legislation which will act as a “deterrent to those engaging in artificial and abusive avoidance schemes” via the Finance Bill 2013.

In essence, the rule will be designed to clampdown on schemes where the “main purpose or one of the main purposes” is purely to reduce the tax liabilities of their members.

The GAAR will cover arrangements which target Income Tax, Corporation Tax, CGT, Fuel Duty, National Insurance, and Stamp Duty Land Tax (SDLT). Other taxes such as Inheritance Tax may be added at a later date.

Will the GAAR work?

Head of Tax at accountancy firm Grant Thornton, Francesca Lagerberg, says that the key to the success of a GAAR will be in defining what an ‘abusive’ tax scheme involves, and “whether it will be possible to easily differentiate the commercially complex from the purely tax motivated scheme. The indications of what will or won’t be caught are likely to be picked over in the courts for many years to come.”

Clearly, the proposed rule will enable HMRC to tackle a wide range of ‘abusive arrangements’, including complex ‘tax planning’ vehicles used by the largest companies to avoid paying UK tax.

You can read the consultation document here (PDF format).

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