GAAR comes into force

Wednesday 17 July 2013

As the Finance Bill 2013 receives Royal Assent today (July 17th), the General Anti-Avoidance Rule (GAAR) officially passes into law. The move marks the end of a long-running and often heated debate, in which individual taxpayers and businesses alike have raised their concerns.

GAAR is one of the most important strands of the government’s approach to cracking down on tax avoidance and lays out the kind of tax arrangements that it deems to be abusive. Applying to income, corporation and capital gains tax as well as stamp duty, petrol and inheritance tax, it will cover a number of the levies that are likely to affect limited company and umbrella contractors, as well as sole traders.

Under the new law, every tax planning measure is subject to a “double reasonableness test”, which means that HMRC must show they could not possibly be considered a reasonable course of action. The tax authorities will be expected to obtain the independent second opinion before bringing action, which will be based on whether the arrangements went against the intention or spirit of the law and whether they were designed to exploit a loophole. If any tax planning measures are found to be abusive, GAAR comes into force to compensate for the revenue that would otherwise be lost by adjusting the taxpayer’s liability.

“This new law is a product of its time – marking public and government concern that some schemes have managed to conjure tax savings out of nowhere,” according to the Chartered Institute of Taxation (CIOT), although it acknowledges that most of these schemes are ineffective given the courts’ approach to tax avoidance.

Only tax arrangements set up from today onwards will come under the scope of the law. But for contractors and freelance workers who deal with their own tax returns, the new legislation could well mark the time to look again at their tax affairs.

“Abusive planning won’t work, but the complexity of business transactions and our existing law will produce an element of uncertainty,” says Stephen Coleclough, CIOT president.

At a time when the legal foundation of business and individuals’ tax affairs is shifting, businesses and the services to which they turn for advice would be wise to reassess their planning strategies, he added. They will need to take a step back and consider whether a company’s tax planning measures are seen as reasonable in the context of the new legislation and the business’ current circumstances, he explained. Nevertheless, Mr Coleclough also said that he hoped the independent GAAR advisory panel would keep working on raising awareness of where the law might apply.

For contractors and their agents who complete self-assessment tax returns, there will be much to think about when completing the annual paperwork. Mr Coleclough says that while it is reassuring that HMRC guidance says most common tax planning practices will not be affected, there is likely to be some uncertainty in the early stages until the law is more firmly embedded. As a result, for many contractors and freelancers this could be an important moment to re-evaluate their tax affairs and make sure that they are on the soundest possible footing.

By Victoria McDonnell

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