Definition§
The General Anti-Abuse Rule (GAAR) is a provision within UK law aimed at countering tax avoidance by targeting arrangements that generate a tax advantage through means deemed to be “artificial and abusive.” The reasonableness test involves assessing whether it would be logical for someone to enter the arrangements without considering tax reduction as the main objective. GAAR applies to all principal forms of direct taxation, including inheritance tax, and was implemented following the royal assent to the Finance Act 2013. It is not retroactively applicable to arrangements established before this date.
Examples§
Example 1: Artificial Income Shifting§
A taxpayer sets up a complex web of inter-company transactions and shell companies solely designed to shift income to jurisdictions with lower tax rates, thus significantly reducing their tax liability in the UK. Under GAAR, these arrangements may be assessed and declared abusive, disallowing the tax advantage claimed.
Example 2: Exploiting Loopholes in Gift Regulations§
An individual gifts substantial assets to family members using intricate contractual arrangements that do not reflect genuine gifting intentions but aim specifically to reduce inheritance tax. GAAR can be invoked to challenge and undo these arrangements if judged artificial and abusive.
Frequently Asked Questions (FAQs)§
What is the main objective of GAAR?§
The principal aim of GAAR is to prevent tax avoidance strategies that exploit legal loopholes and arrangements deemed not commercially viable or are primarily designed to obtain tax advantages.
How does GAAR differ from specific anti-abuse rules?§
Unlike specific anti-abuse rules that target particular tax avoidance schemes, GAAR is a broad measure that addresses any arrangement considered artificial and abusive across various tax domains.
Can GAAR be applied retroactively?§
No, GAAR cannot be applied to arrangements established before the enactment of the Finance Act 2013. It only affects transactions and arrangements entered into after the royal assent.
What is considered ‘artificial and abusive’?§
An arrangement is regarded as ‘artificial and abusive’ if it is created mainly to produce a tax advantage rather than having a genuine commercial purpose.
Who decides if an arrangement is abusive?§
The decision is usually made based on the GAAR Advisory Panel’s assessment, which evaluates the reasonableness and commercial substance of the arrangements.
Related Terms§
- Tax Avoidance: Legally exploiting the tax system to reduce current or future tax liabilities.
- Tax Evasion: Illegal practices to avoid taxes, such as not reporting income.
- Finance Act 2013: UK legislation introducing GAAR and other fiscal measures.
- Inheritance Tax: A tax on the estate of the deceased, including property, money, and possessions.
Online References§
Suggested Books for Further Studies§
- “UK Tax System: An Introduction” by Malcolm James
- “Tax Avoidance Law in the UK” by Philip Baker
- “Tolley’s Tax Planning” by Rebecca Benneyworth
Accounting Basics: “General Anti-Abuse Rule (GAAR)” Fundamentals Quiz§
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