General Anti-Abuse Rule - GAAR

Introduction


The GAAR confirms the continuing compliance of the Charles Marcus arrangements which have been accepted by HMRC since 1998.

The GAAR became UK law on 17 July 2013. The fundamental approach of the GAAR is that all (UK) taxpayers should pay their fair contribution (of UK taxes). The GAAR does not ban all tax avoidance. It bans abusive tax avoidance. HMRC has published the Guidance on its website:

www.hmrc.gov.uk/avoidance/gaar-part-abc.pdf

HMRC’s guidance notes describe what is forbidden by the corresponding rules, whereas the GAAR Guidance also describes what is allowed by GAAR. It effectively describes what the legislation considers to be acceptable tax planning. This approach clarifies the ‘grey area’. This clarification includes several aspects which are at the heart of the Charles Marcus business model; but are not covered by legislation. It confirms that the advice of Charles Marcus is consistent with legislation.

Acceptable Tax Planning

The Guidance clearly states that it is entirely reasonable to take tax consequences into account when deciding which course of action to take.

The first example in the Guidance of acceptable tax planning concerns individuals working in a limited company whose shares he or she owns and where he or she works as an employee. A decision to accumulate most of the profits to be paid out in the future by way of dividend, rather than paying a higher salary, should in normal circumstances, be outside the scope of GAAR.

This simple statement eliminates a major concern. Legislation provides for a statutory minimum salary. IR35 rules provide for a deemed salary to replace an accounting dividend. There had previously been mention by HMRC to a ‘reasonable’ salary which was not defined in legislation. Under GAAR this is no longer a concern.

The example is based on the premise of willingly accepting a lower salary than could otherwise be achieved, in return for a future dividend. The example uses a dividend; but there are many reasons for accepting a lower salary e.g. job satisfaction, training, future prospects, environment, status etc.

We now have confirmation of the long established practice that employer and employee are free to agree mutually acceptable terms of employment, including salary, subject to local legislation.

This practice is at the heart of the Charles Marcus business model and that of most limited companies (including personal service companies).

International Tax Arrangements

International tax arrangements are not covered by GAAR. The established rules of international taxation are set out as treaties often called Double Taxation Agreements (DTAs) between States, usually based on the OECD Model Treaty. Over 100 DTAs are given effect in UK domestic law. These rules cover the attribution of profit between group companies of multinational enterprises including Charles Marcus. GAAR cannot be applied to them.

Charles Marcus benefits from arrangements between the UK companies and the international company. HMRC is fully aware of this. GAAR does not apply to these arrangements.

Many of the cases of the kind which generated global media interest (Starbucks, Amazon, Google et al) in early 2013 cannot be dealt with by GAAR.

Charles Marcus has taken the accounting principles used by multinational corporations and applied them to the personal finances of globally mobile individuals. Charles Marcus continues to monitor work in the OECD to revise the OECD Model.

Long Established Practice

The Guidance outlines several categories of situations which will not be covered by GAAR. One of these is ‘established practices’ whereby arrangements have become embedded in tax or business practices in such a way that it would be wrong now to consider them as abusive. These arrangements have been well known to HMRC for many years who have done nothing to stop them. HMRC cannot now use GAAR to stop them.

It is a principle of taxation that money can be tracked from its source until it becomes the income of an individual. The Charles Marcus reserves are the property of the Charles Marcus corporate shareholders. Distributions of the reserves become taxable income only when received by an individual. This has been discussed with, and accepted by, HMRC. It cannot be changed by GAAR. It has been a key component of the Charles Marcus business model since 1998.

The Previous Approach

The Guidance rejects the previous approach that taxpayers or their advisers are free to use their ingenuity by any lawful means, however contrived that might be, to reduce their tax bill. The Guidance cites several court cases, which support the previous approach, as being specifically overruled by the GAAR legislation.

The GAAR legislation imposes a limit on how far taxpayers can go in their tax planning.

The limit is reached when arrangements to achieve the objective go beyond anything which a reasonable person could regard as a reasonable course of action. This is called the ‘double reasonableness’ test. It does not need to be said that for existing legislation the only reasonable course of action is to comply with all existing legislation. The test must be made when existing legislation does not cover an arrangement. The Guidance must be used to interpret the intention of parliament when legislation is not clear.