GAAR: first Advisory Panel opinions

The GAAR Advisory Panel has opined that arrangements to reward employees using a combination of gold and EBT arrangements to avoid a charge to income tax were not a reasonable course of action.

The independent Advisory Panel on the General Anti-Abuse Rule (GAAR) has issued its first opinions as to the reasonableness of tax avoidance arrangements referred to it by HMRC. In three separate opinions that will be welcomed by HMRC, the Panel has comprehensively endorsed HMRC’s claim that arrangements to reward employees using gold and employee benefit trust (EBT) arrangements were not a reasonable course of action.

Background

The GAAR was introduced in 2013 to counter the most “egregious” tax avoidance arrangements. It allows HMRC to counteract abusive tax avoidance arrangements, even where those arrangements would otherwise technically succeed. For an arrangement to be abusive it must fail the double reasonableness test ie an arrangement which is one that cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.

The GAAR is a draconian power and accordingly various taxpayer safeguards were introduced as part of the regime. One is a requirement for HMRC to obtain an opinion from the independent GAAR Advisory Panel on individual cases where HMRC are considering applying the GAAR.

The Panel has now issued its first opinion on arrangements referred to it by HMRC.

Tax arrangements

The opinion concerns arrangements designed to avoid a charge to income tax on monies obtained by X and Y from their company via arrangements involving gold bullion and an EBT. The reward was structured in the following way: a purchase of gold for the employees was funded by the company; that gold was immediately sold by the employees; the company’s liability to pay the third party gold supplier was settled by the employees in return for a director’s loan account credit in favour of the employees; in connection with the purchase of the gold, a long term obligation was created under which the employees were required in the future to pay to the trustees of the EBT an amount at least equal to the purchase price of the gold (plus indexation).

The result of the arrangements was that both employees were left with £150,000 and an obligation to fund the EBT in the future to the same amount. The purported tax result was that the £150,000 was neither taxable as general earnings nor treated as employment income under the disguised remuneration rules. In addition, the company claimed a deduction for corporation tax purposes of £300,000.

The Panel was not required to consider the effectiveness or otherwise of the scheme in the absence of the GAAR. The Panel was merely required to opine on the question whether the tax arrangements were a reasonable course of action in relation to the tax provisions concerned. In three separate opinions (one for the company and one each for X and Y), the Panel concluded that the arrangements were not a reasonable course of action.

In doing so, the Panel considered:

  • the policy objectives of the relevant legislation (both the general scheme of employment taxation and Part 7A in particular) and whether the arrangements were consistent with those policy objectives (no)
  • whether the arrangements involved “contrived or abnormal steps” (yes), and
  • whether the arrangements sort to exploit any shortcoming in the relevant legislation (yes, the absence of a “no connection with tax avoidance arrangements” condition in the relevant provisions).

The Panel was unanimous in concluding that the tax arrangements were not a reasonable course of action in relation to the tax provisions. The Panel summed up the arrangements in the following way. “It was agreed the employees would receive a reward of about £300,000 from their employer, the company. The employees received that reward, albeit subject to contractual obligations to the EBT akin to those of a loan repayment. So the Employees could enjoy their reward without an immediate charge to tax and the company (their wholly owned company) could enjoy an upfront corporation tax deduction, a potential route through the benefits tax legislation was identified. By including in the steps the purchase of gold and the abnormal steps in relation to the funding of the EBT, it was hoped that exceptional tax benefits would flow to the employees and to the Company. The hoped for exceptional tax benefits are that the usual corporation tax deduction provisions for unpaid remuneration do not apply, and that the charging provisions in Part 7A are engaged but, relying on the absence of an explicit “no connection with a tax avoidance arrangement” condition, the prescriptive rules in subsection 554Z8(5) reduce the employee tax charge to zero.”

The Panel suggested that the most likely comparable commercial transaction, without the overlay of contrived or abnormal steps, would have been a funding by the company of the EBT followed by a loan from the trustees of the EBT to the Employees (the terms of repayment mirroring those in the existing agreement).

Comment

It should be noted that the opinion given by the Panel is somewhat different to the actual test of “abuse”. The Panel is only to consider whether they consider the tax arrangements are a reasonable course of action in relation to the relevant tax rules (and not whether they cannot reasonably be so considered). Nevertheless, the opinion is an extremely strong one and seems likely to deter a taxpayer taking the matter further.

It should also be noted that the referral to the Panel was made by HMRC before the actual tax treatment of the arrangements had been determined. It seems entirely possible that these arrangements would have failed either via a purposive construction of the Part 7A provisions or an application of the Ramsay approach. Since the GAAR is essentially a fall-back to deny efficacy to arrangements which would otherwise succeed, it seems slightly surprising that the tax treatment was not determined first. After all, whilst the GAAR Guidance holds out the possibility of HMRC using the GAAR without first determining the tax result, this is seen as an exception to the norm.

Ultimately, HMRC will no doubt be delighted with the vindication of the Panel’s opinion. This first opinion of the GAAR Advisory Panel will only serve to strengthen the deterrent effect of the GAAR.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.