UK introduces anti-abuse rule to prevent abusive tax arrangements

The United Kingdom’s Finance Bill 2013 took effect on July 17th, after receiving royal assent. Among its many provisions, the law aims to prevent tax avoidance by introducing a general anti-abuse rule, which imposes a reasonableness test to prevent abusive tax schemes.

The general anti-abuse rule is designed “for the purpose of counteracting tax advantages arising from tax arrangements that are abusive” (Section 206). It aims to prevent tax avoidance techniques that “cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions” (Section 207).

Under the rule, all the circumstances surrounding the tax avoidance plan are considered, including the express or implied principles underlying the legislation. Factors that will indicate that a tax arrangement is abusive include if it contains “contrived or abnormal steps” or if it is designed to exploit shortcomings in the law.

Other indicators of an abusive tax arrangement include when income, profits or gain from the arrangement are significantly less, or deductions or losses are significantly greater, for tax purposes than for economic purposes.

The general anti-abuse rule applies to income tax, corporation tax, capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax and the annual tax on enveloped dwellings.

While the law sets out a general test for concluding whether an arrangement is abusive, taxpayers will have to wait for guidance from HMRC before they can know exactly what is acceptable or unacceptable under the new rule.

—Alistair Nevius (anevius@aicpa.org) is editor-in-chief, tax for CGMA Magazine.