There are several different pieces of legislation that must be considered by contractors, from the IR35 to Managed Service Legislation, the Offshore or Onshore Intermediaries Legislation or the Agency Workers Regulations. A further piece of legislation was added to that long line – the General Anti-Abuse Rule (GAAR) that was contained in the Finance Act of 2013.
The General Anti-Abuse Rule (GAAR) in Brief
GAAR was brought in in July 2013 to counteract tax advantages which may arise from abusive tax practices. The GAAR understands that contractors gain tax advantages as the main reason for the legal arrangement and is engaged in counteracting such tax advantages. This has a wide scope and is ever present in any tax planning decision, especially as it relates to many different taxes.
The GAAR was brought in to break to traditional cycle of trying to claim as many allowances as possible, instead replacing it with a statutory limit that is limited as reasonable and within a ‘reasonable course of action’.
Explanations of new terms were included in the GAAR, including a ‘tax arrangement’, which is considered to be any arrangement that gives rise to a tax advantage. This is meant to stop abusive applications only and not to entirely block all deductions just any that would be deemed excessive. A safeguard was introduced in the GAAR in the form of a double readiness test in that it must show that the tax advantage is not reasonable under any circumstance or it to be abusive.
Reasons for the Introduction of GAAR
The GAAR was introduced due to the games played by accountants through tax avoidance schemes. HMRC previously targeted only loopholes but over time this became highly complex and too hard to understand. The introduction of the GAAR helped HMRC to understand arrangements early on and gain a higher level of compliance.
How GAAR Works in Practice
If a taxpayer is caught using a tax arrangement or strategy that has been deemed by HMRC as questionable then the GAAR is applied and HMRC will act to reverse all tax benefits claimed, and any omissions can lead to high penalty fines. HMRC will assign an officer to determine whether the tax claim is in order and if not it will assign the taxpayer to be questioned in front of a GAAR panel. The contractor would have the ability to accept the decision or appeal to a taxation tribunal (first tier) which is comprised of tax experts and business people, allowing independence from HMRC.
Although initially GAAR was instituted to apply to income and corporation tax, it now applies to the following categories as well:
- Income Tax
- Corporation Tax (including amounts chargeable or treated as Corporation Tax)
- Capital Gains Tax
- Inheritance Tax
- Petroleum Revenue Tax
- Stamp Duty Land Tax
- Annual Residential Property Tax
How Is GAAR Affecting Contractors?
Contractors are concerned as to how GAAR is going to be implemented. It must be taken into account when determining if a tax strategy is abusive.
James Abbot of the contractor accountant’s Abbot Moore noted last year that:
HMRC is concentrating on high earners first but they will soon move to lower salaried contractors, so staying abreast or putting something in place that can handle every aspect of compliance for you is a good idea. In the future you may be able to purchase tax investigation insurance but until then the choice is to stick with a limited company and risk the wrath of noncompliance or use an umbrella company to ensure that you remain fully compliant with HMRC at all times and in all ways.