Tax evasion, Tax Avoidance and the General Anti Abuse Rule
by George Hatjoullis
The big fuss about ‘dodgy’ tax practices has left the man on the Clapham omnibus thoroughly confused. It used to be a simple distinction between evasion and avoidance. Tax evasion was illegal and tax avoidance was not illegal. It was evasion if one failed to declare taxable income . If one were to legally redirect the income so that it did not come into the taxable category then it was avoidance and legitimate. However, life is no longer quite this simple (and it was never really that simple). From 30/01/2015 something called the General Anti Abuse Rule (GAAR) has kicked in and you can read all about it here (http://bit.ly/1yCl4ve). It seems that a set of actions that though each is legal and designed to minimise tax liabilities can be rendered illegal if they are deemed ‘abusive’.
In a nutshell;
Tax arrangements are ’abusive’ if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances
Note the double reasonableness test.
The GAAR “does not ask whether entering into or carrying out the arrangements was a reasonable course of action in relation to the relevant tax provisions. Instead it asks whether there can be a reasonably held view that entering into or carrying out the tax arrangements in question was a reasonable course of action”.
What does this mean? It means that the reason given for arranging tax affairs in a tax minimising way must be open to being argued to be reasonable. As a general rule if the arrangements are such that the only reasonable purpose is to avoid tax then (I suspect) they will not be judged potentially reasonable. Of course much legislation creates vehicles that are designed to confer a tax advantage in some context. It is is the distortion of this context in a manner not reasonably within the meaning of the legislation for the purpose of gaining a tax advantage in activity outside of the intended context that will attract GAAR attention.
Those interested should read the various documents on the above link. The purpose of this blog was in part to draw attention to the link but mainly to clarify that tax affairs no longer simply fall into binary relations such as legal and illegal or avoidance and evasion. It is more complex and the concepts of abusive arrangements and double reasonableness arise. My own test is that if you need to employ an ‘expert’ to organise your affairs solely for tax minimization reasons then you are drifting into GAAR territory.