Find out about abusive and defeated tax arrangements, and how the legislation is applied.
Tax arrangements will be considered abusive if one of the following applies:
- there is a General Anti-Abuse Rule (GAAR) counteraction of the tax advantage or tax advantages arising from the tax arrangements, which becomes final
- the tax advantage or tax advantages arising from the arrangements have been counteracted either by settlement before any counteraction under the GAAR has been taken or under another provision, but could have been counteracted under the GAAR had it not been for the settlement or for that other provision
Meaning of tax arrangements
See part 3, section C2 to C4 of the GAAR guidance for a more detailed explanation of ‘arrangements’, ‘tax arrangements’ and ‘tax advantage’.
‘Arrangements’ take the meaning often used in anti-avoidance legislation. Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).
So whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement.
The definition of tax arrangements is in paragraph 3(1) of schedule 16 Finance Act (No.2) 2017.
Arrangements are tax arrangements for the purposes of this legislation if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.
This is an objective test which requires that all the relevant circumstances are taken into consideration, before determining that at least one of the main purposes of the arrangements was obtaining a tax advantage.
The test only considers the main purposes of the arrangements and not the main purpose of any particular person who is party to those arrangements. More detail can be found in the GAAR guidance.
The meaning of ‘tax advantage’ is in paragraph 55 of schedule 16 Finance Act (No.2) 2017 and is based on the definition of tax advantage in the GAAR legislation (s208 Finance Act 2013).
‘The main purpose’ and ‘one of the main purposes’ take their ordinary meaning. If the arrangements would not otherwise have been undertaken absent the possibility of gaining a tax advantage, then obtaining a tax advantage would be a main purpose of the arrangements.
Arrangements may be structured to achieve a number of objectives, both from a commercial perspective and in terms of tax. If the arrangements are structured so that achieving a tax advantage is at least one of the main purposes, then they will be tax arrangements.
This might be the case where arrangements include an additional step, without which the commercial objectives could have been achieved, but not the tax advantage.
Meaning of abusive
The definition of when tax arrangements are ‘abusive’ is in paragraph 3(2) of schedule 16 Finance Act (No.2) 2017. This is based on the GAAR ‘double reasonableness test’.
See part 3, section C5 of the GAAR guidance for a detailed explanation of the meaning of ’abusive’ and the ’double reasonableness test’. Section C5 also provides indicators of non-abusive tax arrangements.
However in situations where arrangements seek to circumvent complex rules and are defeated on a technical argument rather than under the GAAR, if the arrangements could have been defeated under the GAAR absent the technical argument, they will be treated as abusive for the purposes of the enablers legislation so that enablers of such arrangements will be liable to an enablers penalty.
Tax arrangements are abusive if, having regard to all the circumstances, the entering into or carrying out of the arrangements cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.
There are 2 parts to the ‘double reasonableness test’:
- Is the entering into or carrying out of the tax arrangements a reasonable course of action in relation to the relevant tax provisions having regard to all the circumstances?
- Having regard to all the circumstances, can that action be reasonably regarded as a reasonable course of action in relation to the relevant tax provisions?
The first part of this test looks at the relevant tax provision in its entirety and considers whether the action taken by the taxpayer in relation to the enabled tax arrangements is consistent with the action that would be expected to be taken in order to obtain the tax outcome intended by that relevant tax provision.
The GAAR Advisory Panel will be involved and provide an opinion or opinions on whether the entering into and carrying out of the enabled tax arrangements or equivalent tax arrangements was a reasonable course of action by the relevant taxpayer in relation to the relevant tax provisions.
The second part looks at whether, in light of all the possible views that could be held in relation to the enabled tax arrangements, the view taken is a reasonably held view.
For example, even if HMRC or some parts of the professional community were of the view that entering into the tax arrangements was not a reasonable course of action, if a reasonably held view is that it was reasonable, the arrangements would not be regarded as abusive.
Paragraph 3(3) of schedule 16 Finance Act (No.2) 2017 states that the circumstances which must be taken into account include whether:
- the substantive result, or the intended substantive result of the arrangements, is consistent with any principles on which the relevant tax provisions are based and the policy objectives of those provisions
- the arrangements achieve the outcome by including one or more contrived or abnormal steps
- the arrangements are intended to exploit a loophole in the provisions
Unlike the GAAR, the intended outcomes must also be taken into account, whether or not these are realised in practice. This is to account for the fact that the enablers legislation applies in relation to arrangements that:
- have been counteracted under the GAAR
- could have been counteracted under the GAAR if they had not been defeated under any other tax provisions or had they not been settled before GAAR counteraction was taken
This includes whether the actions taken were intended to side-step any particular aspect of the tax provisions, whether or not they succeed in doing so.
Examples of abusive tax arrangements
See part D of the GAAR guidance for an illustrative set of examples. The examples at D11 (Vaccine Research) and D13 (Working Wheels) in particular show that these cases preceded the GAAR and were defeated without a referral to the GAAR Advisory Panel.
However, HMRC would regard such arrangements as potentially abusive and consequently would make a referral to the GAAR Advisory Panel for the purposes of considering whether or not to apply a penalty under the enablers legislation.
Defeat in respect of abusive tax arrangements
A person is liable for a penalty under the enablers legislation when the abusive arrangements they have enabled are defeated.
Abusive tax arrangements are defeated when the tax position of the user of those arrangements is final, and on the basis that the arrangements do not provide the anticipated tax advantage, either in part or whole.
Arrangements are defeated where either condition A or condition B in paragraphs 5 and 6 of schedule 16 Finance Act (No.2) 2017 is met.
Condition A: Giving HMRC a document
Condition A is at paragraph 5 of schedule 16 Finance Act (No.2) 2017 and is met when all of the following apply:
- the taxpayer, or any person on behalf of the taxpayer, has given HMRC a document of a kind listed in the table at Paragraph 1 schedule 24 Finance Act 2007, such as returns, statements, declarations and accounts (including a document relating to national insurance contributions to which schedule 24 Finance Act 2007 applies), or has amended such a document after it has been submitted
- the document was submitted on the basis that a tax advantage arose from the arrangements concerned
- part or all of that tax advantage has been counteracted
- the counteraction is final
It does not matter whether the taxpayer has submitted the document or whether an accountant or other representative of the taxpayer has done this on the taxpayer’s behalf.
Condition B: HMRC assessment
Condition B is at paragraph 6 of schedule 16 Finance Act (No.2) 2017 and is met when all of the following apply:
- HMRC makes an assessment to tax
- that assessment counteracts part or all of a tax advantage that it is reasonable to assume the taxpayer expected to obtain from entering into the arrangements
- that counteraction is final - meaning that it can no longer be varied on appeal or otherwise
When a tax advantage is counteracted
A tax advantage is counteracted when adjustments are made to the taxpayer’s tax position to eliminate or reduce a tax advantage (whether by the taxpayer or HMRC) or HMRC makes an assessment on the basis that the tax advantage does not arise, either in part or whole.
When a counteraction is final
A counteraction is final when the tax position can no longer be varied on appeal or otherwise.
For condition A, this could be because the taxpayer has accepted the adjustments reflected in a partial or final closure notice (for example, by not appealing against the making of the adjustments), has entered into a contract settlement to settle their tax affairs, or has taken corrective action in response to a follower notice.
In the case of an appeal, the counteraction will be final when the appeal has been decided and no further appeal can be made, or if the appeal is withdrawn.
For condition B, a counteraction is final when, in relation to the assessment issued by HMRC, the taxpayer does not appeal that assessment within the time allowed for doing so or has entered into a contract settlement to settle their tax affairs, or any appeal has been decided and no further appeal can be made, or if the appeal is withdrawn.
Adjustments and making adjustments
The definition of ‘adjustments’ is in paragraph 5(4) of schedule 16 Finance Act (No.2) 2017. It includes making or modifying an assessment, modifying a return, amending or disallowing a claim or entering into a contract settlement.
References to ‘making’ adjustments include securing that adjustments are made by entering into a contract settlement.
A taxpayer submits a tax return which includes the use of tax arrangements that give rise to a tax advantage. HMRC enquire into the return and conclude that the whole of the tax advantage should be counteracted. The taxpayer does not agree.
HMRC issue a closure notice, making the adjustments that are required to counteract the tax advantage. On further consideration, the taxpayer concedes that the tax advantage does not arise and does not appeal the closure notice.
The conclusion in the closure notice becomes final when the time limit for appealing against it expired and the tax advantage has been counteracted.