Guidance

Technical note for General Anti-Abuse Rule amendments announced at Budget 2018

Published 11 July 2019

Introduction

This note provides further detail on the proposals outlined at the Budget to make procedural and technical changes to the general anti-abuse rule (GAAR). It is written for practitioners advising anyone involved in abusive tax arrangements.

At the Budget on 29 October 2018, the government announced that legislation will be introduced in Finance Bill 2019-20 to make minor procedural and technical changes to the GAAR. This note sets out the details of the government’s proposals and is being published alongside the draft legislation.

This draft legislation focuses on and updates the GAAR procedural framework but leaves the scope of the GAAR unchanged. The changes will ensure that the legislation and GAAR procedure work as originally intended. Safeguards continue to be central to the way the GAAR operates and the role of the independent GAAR panel is unchanged.

The consultation on the draft legislation closes on 5 September 2019. HMRC will be happy to meet with representatives from key stakeholder groups to discuss the draft legislation.

Background

The current position

The GAAR was introduced in 2013 in response to the recommendations in the Aaronson Report published on 21 November 2011. It provides HMRC with the ability to challenge ‘abusive’ tax arrangements where those arrangements are designed to achieve a tax outcome clearly outside the intention of the legislation.

If there are tax arrangements that are abusive, the tax advantages that arise from the arrangements are counteracted by the making of adjustments. Such adjustments may be made by way of an assessment, the modification of an assessment, amendment or disallowance of a claim or otherwise. The adjustments may be made in respect of the tax in question or any other tax. The relevant tax assessment machinery provisions are then triggered under the legislation for each relevant tax.

FA 2016 introduced procedural changes to the GAAR to provide a process for tackling mass-marketed avoidance schemes. The changes provided that HMRC could initiate a 12 month window to gather information and consider whether to continue its GAAR challenge or to tackle the tax arrangements using different technical arguments alone. It is not possible to progress any appeal during this period.

If during the 12 month window HMRC do not reach a decision, no further GAAR action is possible.

In some cases HMRC are finding that taxpayers who are suspected to have engaged in abusive tax arrangements are deliberately avoiding providing HMRC with information. In doing so, they frustrate HMRC’s ability to pursue the GAAR within the permitted 12 month window.

In such cases, the taxpayers’ actions mean that HMRC may not be able to complete its GAAR investigation during the 12 month window as the relevant information has not been provided. There is a risk that HMRC will not be able to collect the tax that the taxpayer has sought to avoid despite the taxpayer’s use of abusive arrangements.

Next steps

The government wishes to provide a balance between ensuring that appropriate safeguards are in place for those taxpayers that engage with us whilst allowing HMRC to tackle those that abuse the rules.

The draft legislation outlines a new protective GAAR notice to replace the existing provisional counteraction notice (PCN). The new notice will enable HMRC to carry on its investigations beyond 12 months and mirrors the way normal tax enquiries work.

As a safeguard, taxpayers will be able to take their appeal against any proposed GAAR adjustment to tribunal 12 months after the protective GAAR notice is issued (reflecting the existing 12 month window during which appeals cannot be progressed whilst HMRC carries out its enquiries).

The changes will also confirm that where HMRC decides not to pursue the GAAR, cases can still be pursued using a technical non-GAAR argument. This has always been the intention of the legislation.

Where HMRC conclude that the GAAR is appropriate the procedural need to obtain the opinion of the independent GAAR panel will remain in place and the taxpayer’s ability to appeal the tax brought into charge after a notice of final decision will remain unchanged.

These changes will remove much of the incentive for taxpayers not to co-operate with requests for information whilst ensuring appropriate safeguards for those who are complying with the rules. These changes do not alter the fundamental GAAR test, safeguards or policy aims.

The proposed technical and procedural changes will remove ambiguity in the legislation and ensure the GAAR works as intended.

The following sections describe these changes in more detail.

Procedural and technical amendments

Amendments to section 209(6)

Section 209(6)(a) provides that HMRC cannot take any steps to make an adjustment under the GAAR unless the full GAAR procedural requirements have been complied with. Section 209(6)(b) provides that the power to make GAAR adjustments is subject to normal statutory time limits.

There are instances in which HMRC is compelled to issue a notice making an adjustment before the GAAR procedure has been completed in order to comply with the time limits. Section 209(6)(a) is being amended to ensure that HMRC is able to do this. The effect of any adjustment will be suspended until after the procedures are complete. This ensures that the GAAR procedure is able to work as intended whilst keeping the full taxpayer safeguards in place.

Other amendments to section 209(6)(a) and (b) ensure that adjustments made under the GAAR following the new protective GAAR notice procedure satisfy procedural and timing requirements.

New section 209AA

As described above, we are changing the way in which HMRC notifies taxpayers of its intention to pursue a tax advantage under the GAAR.

The existing provisions relating to PCNs, sections 209A to 209F, will be repealed.

The draft legislation creates a new protective GAAR notice to replace the PCN. The legislation provides when the notice can be issued and the actions that HMRC may take after it has been issued. Once issued, the protective GAAR notice will continue in place until:

(a) HMRC finishes the GAAR process (having met with the full GAAR procedural requirements)
(b) HMRC withdraws the notice
or
(c) the taxpayer is successful on appeal

Under section 209B there is currently a stay on appeals for the period of 12 months from the issue of the PCN. Under the new rules this will effectively be replicated by providing a similar stay on appeals (section 209AA (5)). This stay will apply for the 12 months from the date the new protective GAAR notice is issued.

As with the PCN, there is no appeal right against the issue of the notice itself. However, the taxpayer will be able to progress their appeal if they wish, against the adjustments specified in the protective GAAR notice after this 12 month point as a safeguard against undue HMRC delays.

Once HMRC has concluded its enquiries and considers the GAAR to be in point it will proceed following the normal GAAR process fulfilling the requirements of section 209(6) Part 5 FA 2013.

The existing safeguards whereby the independent Advisory Panel provides an early opinion on whether tax arrangements can be regarded as reasonable and where Panel opinions must be considered by HMRC in reaching a final decision on whether to counteract the tax advantage will be unchanged.

The taxpayer’s right to appeal any final adjustment made under the GAAR also remains unchanged.

Running non-GAAR technical arguments

Under the old PCN process there was a risk that if none of the actions set out in section 209(B)(4) were taken, HMRC might lose its ability to challenge the arrangements under its non-GAAR technical arguments as well as under the GAAR. This was due to a potential anomaly in the meaning of ‘notified adjustments’ in section 209A(2) and was never the intention of the legislation.

The position is clarified in the new legislation so that if during any stage of the process HMRC no longer wish to or are unable to pursue the GAAR, that decision or outcome will not impinge on HMRC’s ability to pursue any tax due using a technical argument where this is appropriate.

Substantive notices under Schedules 43 or 43A

If a taxpayer has received a substantive notice such as those issued under Schedule 43 paragraph 3, or schedule 43A paragraph 1 or 2, they will know that a designated officer considers the GAAR is in point. We therefore believe there should be no need for a separate protective GAAR notice informing the taxpayer that formal GAAR proceedings have commenced.

New section 209AB provides for substantive notices issued under Schedule 43 paragraph 3 or schedule 43A (pooling and binding) to have the same effect as a protective GAAR notice (in addition to their primary function) as long as they are issued within the ordinary assessing time limit prior to any GAAR adjustment being made.

Schedule 43A paragraph 11 - equivalent arguments

Schedule 43A paragraph 11(1) is amended by removing the reference to paragraph 1 so that the definition of ‘equivalent arrangements’ clearly applies not just for pooling purposes but also to binding and generic referrals as intended.

Schedule 43C paragraph 5 (penalty under section 212A)

Schedule 43C paragraph 5 deals with the assessment of the GAAR penalty. Paragraph 5(5) states that an assessment of a GAAR penalty must be made before the end of the period of 12 months beginning with:

(a) the end of the appeal period for the assessment which gave effect to the counteraction mentioned in section 212A(1)(b)
or
(b) if there is no assessment within paragraph (a), the date (or the latest of the dates) on which that counteraction becomes final (section 210(8)). (This means when the adjustments made to effect the counteraction, and any amounts arising as a result of those adjustments, can no longer be varied, on appeal or otherwise)

There is no definition of ‘appeal period’ for the purposes of Schedule 43C FA 2013.

Paragraph 5 is amended to make it clear that an assessment of a penalty under section 212A must be made within 12 months of the adjustments made under section 209 becoming final, that is, when the amounts arising as a result of those adjustments can no longer be varied on appeal or otherwise.

Commencement provision

The amendments to section 209(6)(a) FA2013 suspending the effect of adjustments made under section 209 until the GAAR procedural requirements have been satisfied will have effect in relation to adjustments made on or after the date of Royal Assent.

The new protective GAAR notice provisions will have effect in relation to notices issued on or after Royal Assent. A protective GAAR notice cannot be given if a PCN has already been issued.

The repeal of the PCN framework under sections 209A to 209F will not affect the operation of these provisions in relation to PCNs issued before the commencement date.

The changes to the administrative provisions for the GAAR penalty will only apply to cases where a person becomes liable to a penalty on or after the commencement date (the date of Royal Assent).

New section 209AB will have effect in relation to notices issued on or after Royal Assent.

Finally, the amendment to schedule 43A paragraph 11 will have effect on or after Royal Assent.

If you have any queries or would like to meet please contact Tony Zagara, email: antonio.zagara@hmrc.gov.uk.