Examples of how the GAAR applies to tax arrangements

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In economic substance, UK bank is commercially almost flat: it pays 100m for its interest in the UUT and receives a gross income stream of £100m. 2.3.3 The relevant tax provisions Sections 941, 942 and 943, Income Tax Act 2007 (“ITA 2007”) Section 504, ITA 2007 Section 18, Taxation (International and other Provisions) Act 2010 (“TIOPA 2010”) 2.3.4 The taxpayer’s tax analysis UK Bank In relation to UK Bank, it receives in Tax Year 2 a distribution of gross amount £100m. It has paid £100m to obtain that income so makes no profit. The tax deemed to have been deducted by the trustees from the payment under section 941, ITA 2007 is treated by section 848, ITA 2007 as tax paid by UK Bank. Section 967, Corporation Tax Act (“CTA”) 2010 allows UK Bank to set off the income tax it is treated as having paid against corporation tax to which it is liable or to obtain “repayment” of it. By contrast, if overseas dividend income had been received directly in these circumstances, section 44, TIOPA 2010 (credit against tax on trade income) would have prevented UK Bank from obtaining any benefit from the overseas tax (since the overseas tax could only be set against the UK tax on the “turn” that it had made on the deal). Trustees In Tax Year 1, the MOD is treated as overseas dividend income after deduction of deemed overseas tax such that the trustees’ income tax liability under section 504, ITA 2007 is reduced by the deemed foreign tax in accordance with section 26, ITA 2007 and section 18, TIOPA 2010. This results in a net tax rate of only 5% on the gross MOD income of the UUT. No collectable amount arises under section 942, ITA 2007 in Year 1 as there is no distribution and the trustees’ income pool under section 943, ITA 2007 is increased by the gross income received (case 2 of section 943 applies). In Tax Year 2, no liability arises under section 504, ITA 2007 on distribution of the income as no income is received by the UUT and the collectable amount is reduced to zero under section 942(4), ITA 2007 by virtue of the income pool created by the undistributed income in Tax Year 1. So the overall effect of the arrangements is: • to convert overseas tax (which would be subject to restrictions if received in that form) into UK tax subject to no such restriction; and 16
• to result in the UK exchequer giving credit (or “repaying”) tax that has never been paid. 2.3.5 What is the GAAR analysis under clause 2(2)? 2.3.5.1 Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions? From HMRC’s perspective there are a number of distinct indications that the claimed tax outcome is not consistent with the relevant tax rules. The first is that UK Bank obtains credit for tax that has not and will not be paid. This is not consistent with the principles of the DTR rules that aim to give relief from double taxation but do not aim (absent express provision to the contrary) to result in double non-taxation. The second is that the substance of the arrangement is that UK Bank receives overseas dividend income as part of its trade. Normally section 44, TIOPA 2010 would have applied. However, as the income is routed through a UUT the actual treatment is not consistent with those rules. The final indication is that the implied basis on which the UUT rules reduce the “collectable amount” in relation to a distribution made in Tax Year 2 is that the source income will have given rise to income tax in Tax Year 1. That however is not the case here as the income is covered by deemed DTR. 2.3.5.2 Does the means of achieving the substantive tax results involve one or more contrived or abnormal steps? Ordinarily, interests in a UUT would be widely held by unconnected investors. This UUT has been set up for a short period, with just two investors. All the income is received in one Tax Year but the distribution date is fixed for the next Tax Year. The income in the first Tax Year gives rise to little UK tax liability because of the availability of DTR. That DTR does not correspond to any actual net payment of foreign tax. The income arising to the UUT then declines so that when the later distribution of income is made, the trustees are not required to account for income tax. All of the steps appear to be abnormal and contrived, but in particular the setting up of the passive UUT in order to route MODs through it and thus convert non-repayable foreign tax into repayable income tax is a key abnormal and contrived step since there is no other obvious purpose to setting up the UUT. 2.3.5.3 Are the arrangements intended to exploit any shortcomings in the relevant tax provisions? The arrangements intended to exploit two shortcomings of the tax provisions. 17
Page 1 and 2: HMRC’S GAAR GUIDANCE- CONSULTATIO
Page 3 and 4: 1. Background to the examples 1.1 H
Page 5 and 6: 2. Corporation tax examples to whic
Page 7 and 8: does it represent almost the whole
Page 9 and 10: 2.2 Capital Allowances - Double Dip
Page 11 and 12: 2.2.5 What is the GAAR analysis und
Page 13 and 14: 2.3 Unauthorised Unit Trusts 2.3.1
Page 15: The scheme in detail On or before 3
Page 19 and 20: 3. Capital gains tax and income tax
Page 21 and 22: 3.1.5 What is the GAAR analysis? 3.
Page 23 and 24: 3.2 Blumenthal - QCB/Non-QCB 3.2.1
Page 25 and 26: underlying principle is that the ac
Page 27 and 28: chance that it would be met in the
Page 29 and 30: 3.3.5.4 Does the arrangement includ
Page 31 and 32: 3.4.4 The taxpayer’s tax analysis
Page 33 and 34: 4. Inheritance tax- examples to whi
Page 35 and 36: In both situations the non-tax resu
Page 37 and 38: 4.2.3 The relevant tax provisions S
Page 39 and 40: 5. SDLT- examples to which the GAAR
Page 41 and 42: If the A to B transaction completes
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Page 49 and 50: interest rule, in order to ensure t
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(A1) For the purposes of corporatio
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Finance Act 1996 Section 91B: Non-q
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(2) For the purposes of this Schedu
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(6) For the purposes of this paragr
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145. Since then, these proposals ha
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(a) given by or on behalf of any on
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(b) paid after the withholding from
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Case 1 This case applies if the tru
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(1) The basic rule is that the defi
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(c) income which arises from a sour
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those profits by the Island but onl
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