Examples of how the GAAR applies to tax arrangements

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arrangements so that it is practically certain that this payment will have to be made. This is abnormal and contrived. 3.1.5.3 Were the arrangements intended to exploit any shortcomings in the relevant tax provisions? The scheme seeks to exploit the provisions at section 583, ITA 2007 on the basis that they will be held to operate in an entirely mechanical and prescriptive way. 3.1.5.4 Does the arrangement include any of the indicators of abusiveness within clause 2(4) of the draft GAAR? The arrangements result in a claimed tax loss which is far greater than the economic loss to the taxpayer. This outcome could not have been intended when the relevant legislation was enacted. 3.1.5.5 Do the tax arrangements accord with established practice and has HMRC indicated that it accepts that practice? This is a disclosed tax avoidance scheme. HMRC has never accepted that these arrangements give rise to the claimed tax result. 3.1.6 Conclusion On the facts given the arrangement is abusive and one to which HMRC would seek to apply the GAAR. 22
3.2 Blumenthal – QCB/Non-QCB 3.2.1 Background to the QCB/NQCB regime The capital gains tax code contains provisions which prevent a capital gain being triggered on a "reorganisation" of share capital. "Reorganisation" treatment usually involves any capital gain on the original asset being "rolled over" into the new asset, i.e. there is no disposal of the original asset but rather the new or altered asset is treated as the same asset as the original asset (section 127, TCGA 1992). This treatment becomes problematic if shares are exchanged for qualifying corporate bonds (QCBs), because gains on QCBs are exempt from capital gains tax (section 115, TCGA 1992). If a shareholder disposed of shares in exchange for QCBs, then, on the redemption of the QCBs the capital gain would disappear. Likewise, if non qualifying corporate bonds “NQCBs” into which a gain had been rolled over were converted into QCBs, normal "reorganisation" treatment would mean that the gain on a disposal of the QCBs would again become exempt. Parliament anticipated this problem by enacting special provisions for "reorganisations" involving QCBs. Under these rules, the original asset (e.g. the shares or the NQCBs) is treated as if it had been disposed of for a consideration equal to its market value immediately before the transaction (section 116(10)(a), TCGA 1992). Any chargeable gain or allowable loss that has accrued is postponed, for tax purposes, until the disposal (e.g. the sale or redemption) of the QCBs which represent the original asset (section 116(10)(b), TCGA 1992). What would happen if the acquiring company became insolvent before the QCBs were redeemed? In that case, the holder of the QCBs would be taxed on the "frozen" gain even though, in economic terms, he or she had sustained an economic loss when the QCBs turned out to be worthless. To guard against this risk, many transactions which involve a shareholder selling shares in exchange for loan notes are structured so that the loan notes are NQCBs. If the issuer of the loan notes becomes insolvent before redemption the inherent gain that was rolled over into the loan notes is reduced or eliminated if the loan note holder receives reduced proceeds on redemption. The loan notes can be structured as NQCBs by ensuring that they contain an option permitting redemption of the loan note in a foreign currency fixed by reference to an exchange rate shortly before (but not on) the redemption date. This has the effect of taking the loan notes out of the statutory definition of QCBs at section 117, TCGA 1992. 3.2.2 The scheme 23
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 and 16: The scheme in detail On or before 3
Page 17 and 18: • to result in the UK exchequer g
Page 19 and 20: 3. Capital gains tax and income tax
Page 21: 3.1.5 What is the GAAR analysis? 3.
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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Page 57 and 58: Section 942: Income tax to be colle
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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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Examples of how the GAAR applies to tax arrangements

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