The GAAR was enacted in FA 2013 following a long period of consultation, between 2010 and 2013, in which ICAEW was heavily involved.
The GAAR is designed to bring to an end abusive tax arrangements which fall foul of a double reasonableness test i.e. “arrangements which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.”
Cases are referred by HMRC to the GAAR Advisory Panel to ensure that they do genuinely fall foul of the double reasonableness test.
Paragraph B14.1 of the GAAR guidance states:
“The procedure for applying the GAAR to any arrangement requires that the proposed application of the GAAR should be put before an advisory panel, independent of HMRC, who will give their opinion (or opinions if they are not unanimous) as to whether the arrangements in question constitute a reasonable course of action.”
As stated in the title of this piece this is the first Opinion Notice of the GAAR Advisory Panel to determine whether, in its opinion, the particular case fails the double reasonableness test.
The GAAR Advisory Panel has published three Opinion Statements in relation to the three protagonists: the company and the two shareholders who are referred to as Mr X and Mrs Y.
The Opinion of the GAAR Advisory Panel is that:
“the entering into, and the carrying out of, the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions”.
The facts of this case, the first to be the subject of a GAAR Opinion Notice, are set out in paragraphs 4.1 and 4.2 of the Opinion:
“4.1 The Company wished to reward and incentivise its key employees Mr X and Mrs Y. Advice was sought on how to structure this reward so it would not constitute remuneration for tax purposes.
4.2 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 facts and the purposive analysis of the relevant legislation are set out in section 15 of the Opinion Notice which is reproduced in full below:
“15.1 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.
15.2 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.
15.3 In our view the most likely comparable commercial transaction, without the overlay of contrived or abnormal steps, is 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).
15.4 In our view neither the entering into nor the carrying out of the complex steps in this case amount to a reasonable course of action in relation to the provisions charging tax on and giving deductions for employee rewards.
15.5 Each of the circumstances set out in section 207(2) FA 2013 point unambiguously towards both the entering into and the carrying out of the steps as not amounting to a reasonable course of action in relation to the relevant corporation tax, income tax, PAYE and NICs provisions:
(a) the substantive results of the steps taken are not consistent with the principles on which section 62 and Part 7A (including section 554Z8), and
(b) the means of achieving the intended result relies on contrived and abnormal steps, in particular the introduction of gold where the use of cash would have been more natural and cheaper, and the assumption by the Employees of the Company’s obligation to fund the EBT; and
(c) the steps are intended to exploit shortcomings in Part 7A, and in particular the lack of an explicit “no connection with a tax avoidance arrangement” condition in section 554Z8(5).
15.6 This is a clear case of associated taxpayers seeking to frustrate the intent of Parliament by identifying potential loopholes in complex interlinking anti-avoidance legislation, and arranging a series of intricate and precise steps to exploit those loopholes so as to gain an unexpected and unintended tax “win”.
It should not come as a surprise that we conclude the steps taken are not a reasonable course of action.”
Rangers decision in the Supreme Court
This first GAAR Panel Opinion Statement follows very shortly after the Supreme Court judgment in the Rangers case, see our earlier report.
In that case the Supreme Court decided that:
“…. payments that the employees had agreed should be paid to trusts which then made loans to the employees were earnings when paid to the trusts and therefore liable to tax and national insurance contributions at that time, rather than beneficial loans.”