Penalties for the General Anti-Abuse Rule

Who is likely to be affected

This measure will affect taxpayers engaging in abusive tax avoidance arrangements which fall within the General Anti Abuse Rule (GAAR).

General description of the measure

The measure will introduce a penalty of 60% of the tax due which will be charged in all cases successfully tackled by the GAAR. The government will also make small changes to the GAAR’s procedure to improve its ability to tackle marketed avoidance schemes.

Policy objective

This is one of several measures being introduced that seek to clamp down on the appetite for and supply of tax avoidance by increasing the deterrent effect of engaging in abusive tax avoidance.

Despite considerable progress in tackling tax avoidance, there remains a small but persistent number of tax avoiders who remain undeterred from engaging in abusive tax avoidance. By developing a range of effective deterrents, the government seeks to change the behaviour of the most persistent tax avoiders who continue to try to circumvent their tax obligations and so avoid making their fair contribution to society.

This measure will strengthen the deterrent effect of the GAAR by ensuring that there is an effective disincentive from entering into abusive tax avoidance in the first place, and that those who do engage in abusive tax avoidance are subject to an appropriate downside.

Introducing small changes to the GAAR procedure will strengthen the impact of the GAAR in tackling marketed avoidance schemes.

Background to the measure

Following a consultation in early 2015, the government announced at March Budget 2015 that it would introduce a specific, tax-geared penalty to cases tackled by the GAAR. At Summer Budget 2015, the government announced that it would consider measures to improve the application of the GAAR to marketed avoidance schemes. A further consultation on the details of the measure ended in October 2015.

Detailed proposal

Current law

Current law is included in Part 5 and Schedule 43 of the Finance Act 2013.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to introduce a new penalty for the GAAR. This will be triggered when a taxpayer submits to HM Revenue and Customs (HMRC) a return, claim or document that includes arrangements which are later found to come within the scope of the GAAR.

The penalty will become chargeable at the point that HMRC successfully counteracts abusive tax arrangements under section 209 of Finance Act 2013. That is, where there is no appeal against the counteraction or, if there is, the appeal is not successful.

The existing penalty rules in Schedule 24 to the Finance Act 2007 will continue to apply in GAAR cases as they do to any other case. However, in situations where a combination of a GAAR penalty and a Schedule 24 penalty in respect of the amount of tax counteracted by the GAAR exceeds the amount of that counteracted tax, the total penalty will be restricted to 100% of that tax, or for offshore matters up to the highest penalty available under Schedule 24.

HMRC will provide notice that a taxpayer may be within the scope of the GAAR, and the taxpayer will be given the opportunity to correct their tax position up until the point that their arrangements are referred to the GAAR Advisory Panel. In doing so, the taxpayer will not be liable to a GAAR Penalty.

The GAAR procedure will be amended such that a GAAR Advisory Panel opinion will enable counteraction of the same arrangements by other users. The GAAR procedure will also be amended to enable a “protective” assessment of tax, to align the GAAR procedure with the overarching enquiry framework.

These figures are set out in Table 3.1 of Autumn Statement 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2015.

This measure supports the Exchequer in its commitment to protect revenue.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The costing includes a behavioural effect to account for taxpayers who are deterred from using abusive avoidance schemes due to the introduction of the penalty.

Impact on individuals, households and families

The measure will mainly impact on a very small number of taxpayers who engage in or promote tax avoidance. Individuals who use avoidance schemes will generally be higher rate taxpayers.

The measure is not expected to impact on family formation, stability of breakdown.

Equalities impacts

This measure does not have a direct or indirect equality impact but will affect individuals who are likely to share protected characteristics with others of above average means. It is anticipated that equality groups represented in lower income groups are less likely to be affected.

Impact on business including civil society organisations

This measure will have no impact on businesses and civil society organisations who are undertaking normal commercial transactions; it will only impact on the businesses that are engaging in or promoting tax avoidance.

Operational impact (£m) (HMRC or other)

There will be no significant operational impact arising from this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through recording of number of cases and amount of revenue received where a GAAR penalty has been applied.