Business Taxation - Anti-Avoidance Legislation (1)

Question 1

What is anti-avoidance legislation?

Answer 1

Anti-Avoidance Legislation: A range of legislation targets tax avoidance, the main being ‘GAAR’. Tax avoidance is not the same as tax evasion.

(1) Tax Avoidance: Exploitation of tax law to reduce tax. Lawful unless abusive.

(2) Tax Evasion: Breaking the law to reduce tax. Always unlawful.

Question 2

What is the general anti-avoidance rule?

Answer 2

General Anti-Avoidance Rule: The General Anti-Avoidance Rule is a mechanism under various legislation which permits HMRC to rectify abusive tax avoidance arrangements.

Question 3

What is an abusive tax avoidance arrangement?

Answer 3

Abusive Tax Avoidance Arrangement: HMRC has power to adjust tax liability for a taxpayer who has gained a tax advantage from an abusive tax avoidance arrangement (s209 Finance Act 2013). The burden of proof lies on HMRC, who must establish:

(1) Abusive Arrangement: An arrangement that cannot reasonably be regarded as a reasonable course of action.
Example: A scheme involving contrived or abnormal steps to exploit loopholes and shortcomings is likely to be abusive, unless the HMRC has indicated that it is an acceptable practice.
>This is known as a ‘double reasonableness test’, allowing for a wide range of potentially acceptable schemes.

(2) Tax Avoidance: The primary purpose of the arrangement must be avoiding full tax liability (s207).

Question 4

What is a tax liabilty adjustment?

Answer 4

Tax Liability Adjustment: HMRC has power to adjust the tax liability of an individual who has used an abusive arrangement scheme. They must:

(1) Notice: Provide notice, laying out the abusiveness of the arrangement and steps or adjustments to be taken.

(2) Adjustments: HMRC can make, or require the taxpayer to make, adjustments that are ‘just and reasonable’.

(3) Objection: The taxpayer can make written representations in their defence. The ‘GAAR Advisory Panel’ will issue an opinion on the matter to both parties.

Question 5

What are the penalties for an abusive avoidance scheme?

Answer 5

Penalties: HMRC can penalise individuals who ‘enable’ an abusive avoidance scheme (Finance Act 2017).

(1) Enabler: Enablers are parties who produced the scheme in the course of their business (not employees).

(2) Penalty: The penalty is usually a fine at the value of the benefit received by the enabler.

(3) Appeal: An enabler may appeal to a tax tribunal.