Examples of how the GAAR applies to tax arrangements

The involvement of an overseas partnership and trust was contrived and
abnormal in the context of a UK individual carrying on a trade in the UK and
was described as wholly artificial by the High Court and Court of Appeal in the
Huitson judicial review proceedings.
The arrangements are contrived and abnormal.
3.4.5.3 Were the arrangements intended to exploit any shortcomings in the
relevant tax provisions?
The scheme attempts to exploit the provisions of the IOM/UK DTA to claim
that a very low effective rate of tax is paid by a UK resident on profits from a
trade.
3.4.5.4 Does the arrangement include any of the indicators of abusiveness
within clause 2(4) of the draft GAAR?
The arrangements result in an amount of income for UK tax purposes
(£15,000pa) which is significantly less than the amount for economic purposes
i.e.(£15,000 plus the amounts received from the IOM trustees).This could not
have been the intention when the relevant provisions were negotiated and
enacted.
3.4.5.5 Do the tax arrangements accord with established practice at the time
they were entered into and has HMRC indicated its acceptance of that
practice?
HMRC had never accepted that the arrangements gave rise to the claimed tax
result. On the contrary HMRC had advised taxpayers that the arrangements
did not succeed and advised them to pay tax on that basis.
In the judicial review launched by one of the contractors, Mr Robert Huitson,
the High Court judge found, as one of a number of incontrovertible
propositions that, “At no time did HMRC accept the interpretation advanced by
the claimant, or by other taxpayers who were in a comparable position. On the
contrary, HMRC challenged that interpretation.”
3.4.6 Conclusion
On the facts given the arrangement is abusive and one to which HMRC would
seek to apply the GAAR.
32