Examples of how the GAAR applies to tax arrangements

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The context given for each of the GAAR examples is inevitably incomplete. In none of the examples is any single factor or consideration conclusive as to the application of the GAAR. Rather it is the cumulative weight of all of the circumstances given that leads to the conclusion that the GAAR does or does not apply. It is possible that the same arrangement carried out in different circumstances might lead to a different GAAR analysis. For example: if a particular, apparently egregious arrangement were forced on the taxpayer by a regulatory requirement this might lead to the conclusion that the GAAR did not then apply. Similarly, if an arrangement were carried out following a change of law and a clear Written Ministerial Statement about the intent of that change had been made, attempts to work around the new rules might lead to the conclusion that the GAAR did apply. 4
2. Corporation tax examples to which the GAAR applies 2.1 Shares as debt 2.1.1 Background Following disclosures under DOTAS, legislation (shares as debt rules) was introduced in 2005 to tax companies holding shares with certain debt-like characteristics as if the shares were loan relationships. This legislation applies if various conditions are met, one of which is that the value of the shares is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest. If all the conditions are met then the taxable amounts deriving from the shares are determined on the basis of fair value accounting: that is the charge for an accounting period is based on the difference between the opening and closing fair value of the shares plus income paid in the meantime. The scheme below is intended to exploit those rules. 2.1.2 The Scheme Company A acquires shares in a connected company (Company B) that have been created for the scheme. The shares meet the conditions of the shares as debt rules and are acquired at fair value of, say, £100m. For the first two months, the shares increase in value in a way that equates in substance to a commercial rate of interest. Shortly afterwards Company B makes a distribution of £95m to Company B, in the form of a bonus issue of debentures. This is a depreciatory transaction: after the distribution is paid the shares have a fair value of approximately £5m. 2.1.3 The relevant tax provisions Section 91B of FA 1996 (as inserted by paragraph 10 of Schedule 7 to F(No.2)A 2005) 2.1.4 The taxpayer’s tax analysis The company contends that the shares fall within section 91B, FA 1996 and claims a non-trading loan relationship loss of approximately £95m. The basis of the company’s claim is as follows: • Under section 91B(3), FA 1996 the deemed loan relationship is subject to tax on the basis of fair value accounting. • Under section 91B(2)(b), FA 1996, a distribution under section 209(2) (a) and (b), Income and Corporation Taxes Act (“ICTA”) 1988 is for this purpose not a distribution, but the issue of the bonus debenture falls within section 209(2)(c) and so retains its character as a distribution. 5
Page 1 and 2: HMRC’S GAAR GUIDANCE- CONSULTATIO
Page 3: 1. Background to the examples 1.1 H
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 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
Page 51 and 52: 7.1.5.4 Does the arrangement includ
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The substantive result of the arran
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Section 942: Income tax to be colle
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(iii) not a transitional serial int
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(2) Companies shall be chargeable t
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(8) In this section— “interveni
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(5) So far as the relevant transact
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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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