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Guidance in relation to part 3A section 81 of the Tax Collection and Management (Wales) Act 2016 in relation to the general anti-avoidance rule.

TCMA/8010 Purpose and status of this guidance

The General Anti-avoidance Rule (‘GAAR’) applies to Welsh devolved taxes. The devolved taxes are land transaction tax (‘LTT’) and landfill disposals tax (‘LDT’). The UK General Anti-Abuse Rule does not apply to the Welsh devolved taxes.

It should be noted that whilst there are similarities between the GAAR that operates in relation to the Welsh devolved taxes and the UK General Anti-Abuse Rule and Scottish General Anti-Avoidance Rule it contains a number of distinct differences from both these rules. It is therefore important when considering the application of the GAAR to the devolved taxes that taxpayers, their advisers and the WRA staff are fully aware of the legislation which is found in Part 3A of the Tax Collection and Management (Wales) Act 2016 (sections 81A to 81I), and this guidance.

This guidance has 3 main objectives:

  • to give a broad summary of what the GAAR is designed to achieve, and how the GAAR operates to achieve it
  • to help with the interpretation and application of the GAAR, by discussing its purpose, considering particular features of the GAAR and, where appropriate, illustrating that discussion by means of examples, and
  • setting out how the GAAR will be used by WRA to counteract avoidance activity

Whilst the guidance is intended to be a helpful tool for taxpayers, it cannot provide complete clarity or certainty. The GAAR is intended to catch situations or transactions that were not specifically considered or anticipated at the time of its enactment. If there is doubt as to whether a particular transaction may be caught by the GAAR, taxpayers should exercise caution and anticipate that the WRA will seek to proactively apply a wide interpretation of the GAAR.

Unlike the UK General Anti-Abuse Rule, this guidance is not specifically referred to in the legislation. There is no requirement akin to Section 211(2) of Finance Act (FA) 2013, which requires any court or tribunal which is considering the application of the UK General Anti-Abuse Rule to take into account the HMRC guidance.

It will be for the court or tribunal to decide what evidence to consider and what significance is to be given to this guidance in any proceedings in relation to the application of the GAAR.

The guidance is tailored to the Welsh devolved taxes. The partial devolution of income tax to Wales will not be covered by the GAAR as income tax will remain under the administration of HMRC and the UK General Anti-Abuse Rule will continue to apply.

Guidance is also provided in relation to the procedural aspects of the operation of the GAAR. This includes the making, by the WRA, of proposed and final counteraction notices and how adjustments to bring any tax to be assessed under the GAAR will be effected.

TCMA/8020 What the GAAR is designed to achieve

The enacting of the GAAR by the National Assembly for Wales (‘the Assembly’) is a clear statement that no-one will be permitted to limit their liability to devolved taxes by engaging in artificial tax avoidance.

Rather, the Assembly has imposed a statutory limit to the extent a taxpayer can go when trying to limit their liability to tax. A taxpayer who enters into artificial tax avoidance arrangements that do not constitute a reasonable course of action may find that the GAAR is used to counter their tax planning.

The primary purpose of the GAAR is to provide the WRA with a robust tool to tackle artificial arrangements that create a tax advantage that the Assembly did not intend when enacting the relevant legislation. The GAAR should therefore, primarily, deter taxpayers from entering such arrangements.

The GAAR is not intended to stop taxpayers arranging their affairs to, for example, claim reliefs that the Assembly intends to be claimed. However, a taxpayer arranging their affairs in an artificial way to put themselves, or another taxpayer, in a position to claim a relief that would not otherwise have been available to them may find that the GAAR will be used to counteract the tax advantage gained.

TCMA/8030 Arrangements which are caught by the GAAR

The GAAR provides the WRA with a power to counteract a “tax advantage” deriving from an “artificial tax avoidance arrangement”. The 3 elements of this (“tax advantage”, “artificial” and “tax avoidance arrangements”) have been defined in the TCMA at sections 81D, 81C and 81B respectively.

The meaning of “tax advantage”

In the GAAR, a “tax advantage” can only mean one of the things listed in section 81D. These are:

  • the claiming of a relief or an increased relief from tax
  • the repayment of or an increased repayment of tax
  • the avoidance or the reduction of a charge to tax
  • the deferral of a payment of tax or the advancement of a repayment of tax, and
  • the avoidance of an obligation to deduct or account for tax

The meaning of “tax avoidance arrangements”

Section 81B(1) provides that an arrangement is a “tax avoidance arrangement” if:

“the obtaining of a tax advantage for any person is the main purpose, or one of the main purposes, of a taxpayer entering into the arrangement”.

In order for a taxpayer’s affairs to potentially be counteracted by the GAAR the taxpayer must have sought to obtain an advantage for themselves or another person by, for example, paying less tax, making a claim to repayment or delaying the payment of tax. The obtaining of that advantage must have been the main or one of the main reasons for including or structuring the arrangements in the manner that resulted in the advantage.

The test therefore covers situations where the main purpose was the obtaining of the tax advantage and cases where the obtaining of the tax advantage was one of the main purposes. In many cases, for example in land transaction tax, the main purpose may be obtaining ownership of the land.

However, if arrangements are structured in such a way that they result in, for example, no or less tax being payable than would otherwise have been absent those arrangements, then the reduction of the tax liability is likely to be one of the main reasons for the arrangements being entered into. When determining whether the arrangements are tax avoidance arrangements, the tax that would have been payable (or not repayable) if the arrangements had not been entered into is an important factor. Therefore if tax would have been payable absent the arrangements, then in the absence of other evidence, this may indicate that they are tax avoidance arrangements.

The main, or one of the main, purposes test

The definition of “tax avoidance arrangement” includes cases where “the main, or one of the main, purposes” (‘main purpose test’) of entering into the arrangement is to obtain a tax advantage.

In applying the GAAR the WRA will give consideration to the decisions of the courts and tribunals in regard to the meaning of main purpose and one of the main purposes.

It should be noted that the “main purpose” test does not operate in isolation, as the tax avoidance arrangements must also be artificial.

Meaning of “arrangement”

The definition of an arrangement for the purposes of the GAAR is wide and includes (in section 81B(3)(a)) any:

  • transaction
  • scheme
  • action
  • operation
  • agreement
  • grant
  • understanding
  • promise
  • undertaking
  • event

The definition also includes any series of the above either of one of the list (for example, a series of transactions) or in combination with one or more of the other listed arrangements.

The GAAR applies to all Welsh devolved taxes, the definition of “arrangement” therefore ensures that avoidance arrangements involving landfill disposals tax (which might involve a particular “event” or an individual undertaking a particular “action” or “operation”) are also within the scope of the GAAR.

Meaning of “artificial”

A tax avoidance arrangement will be “artificial” if entering into it or carrying it out is not a reasonable course of action in relation to the legislative provisions applying to the arrangements.

Section 81C(2) sets out 2 of the factors which might be taken into account when deciding whether an arrangement is artificial:

  • Does the arrangement have any “genuine economic or commercial substance”?

    Having regard to whether the arrangement has “any genuine economic or commercial substance” enables the WRA (and therefore the taxpayer and ultimately any tribunal or court) to consider the reasons behind the structure of the transaction. Other targeted anti-avoidance rules (“TAARs”) on the UK statute book already operate by reference to whether an arrangement has a “genuine commercial substance” (For example, sections 455 and 446A of the Income Tax (Earnings and Pensions) Act 2003 and regulation 4(2) of the Real Estate Investment Trusts (Prescribed Arrangements) Regulations 2009 (S.I. 2009/3315)), or “bona fide commercial purpose” and practitioners and the judiciary will be familiar with undertaking an assessment as to whether an arrangement has “commercial substance” (For example, paragraphs 2(4A) and 8(5B). Schedule 7 of the Finance Act 2003 and section 734 of the Corporation Tax Act 2010, and the Supreme Court judgment in UBS AG v Commissioners for Revenue and Customs ([2016] UKSC 13). The WRA will give consideration to decisions of the courts and tribunals on the meaning of the tests where the wording is identical or similar to the wording in the GAAR.

    The question of whether an arrangement has any “economic” or “commercial” substance will be one of fact, and it will be for the taxpayer when completing their return to decide whether there was any economic or commercial substance behind the arrangement and the structure created.

    In many cases, the commercial or economic substance of an arrangement will be clearly apparent. For example, in a case where the buyer of land can purchase that land directly in a simple A-B transaction, the taxpayer will achieve their economic and commercial aim (of owning the land) and will not have entered into any arrangements that could be considered artificial or lacking in genuine economic or commercial substance. However, where the buyer enters into a more convoluted, and a more costly (except for any tax advantage), way to obtain the land, it is an indicator that the arrangement may lack genuine commercial substance. This is because, absent the tax advantage, it is reasonable to argue that the buyer would not have incurred that additional cost having regard to the economic and commercial objectives of acquiring the land.

    The rule looks at the “economic” substance, for example, the acquisition of a plot of land of historical importance by a charity may be motivated by that charity’s desire to further its charitable objectives and protect the land in question, rather than for commercial reasons. Furthermore, in land transaction tax some of the reliefs relating to relief for certain transactions relating to social housing (Schedule 14) are likely to have economic substance (home ownership achieved through the giving of consideration for the homer) rather than commercial substance.

  • Does the arrangement result in an amount of tax chargeable that was not the anticipated result of the relevant provisions when enacted?

    The National Assembly for Wales, when passing tax legislation, will have expected that tax will be paid, and reliefs claimed, in accordance with the intention of the legislation. If there are circumstances where the taxpayer, for example, claims relief that results in a lower amount of tax than would have been paid absent the arrangements then it is possible that those arrangements do not result in the anticipated amount of tax being paid.

    Therefore, if a person is able, as a result of the arrangements, to claim a relief which it was not anticipated they should be able to claim, perhaps as a result of convoluted arrangements, then the GAAR provisions may be engaged. The GAAR is independent of the other anti-avoidance rules, and may be used to challenge an artificial arrangement which was itself contrived to exploit a defect, or perceived defect, in the other anti-avoidance rules.

It is important to note that there may be other relevant factors, but this will depend on the nature and circumstances of the arrangement. Each case will need to be considered on its facts.

TCMA/8040 Generally prevailing practice

Section 81C(3) is designed to provide taxpayers with a ‘shield’ against any claim by the WRA that an arrangement is artificial in cases where the arrangement is consistent with generally prevailing practice, and that practice had been accepted by the WRA. This rule is a means of providing additional protection to taxpayers: it would be wrong for the WRA to attempt to recover tax that has been avoided if the WRA had previously indicated that the arrangement was acceptable.

The generally prevailing practice rule provided in section 81C(3) provides an absolute bar against an arrangement being classed as “artificial” in the context of the GAAR.

However, a key point is that the generally prevailing practice must have been something that the WRA is aware of and has indicated that it accepts that the arrangements fall outside the scope of the GAAR. The WRA will have regard to case law that indicates what constitutes generally prevailing practice, such as it not including common misunderstandings of the application of the law. Furthermore, if a set of arrangements that obtains a tax advantage is considered by taxpayers or advisers to be generally prevailing practice, it will not be generally prevailing practice affording taxpayers protection under section 81C(3) if the WRA is not aware of the practice or is aware but has not indicated that it accepts that practice in writing.

TCMA/8050 Is the Welsh GAAR wider than the UK General Anti-Abuse Rule?

It is not considered that the Welsh GAAR is substantively wider than the UK General Anti-Abuse Rule. Apart from the different terminology “artificial” and “abusive”, the key difference between the Welsh GAARs as compared to the UK General Anti-Avoidance Rule is the “double-reasonableness” test. In common with the Scottish General Anti Avoidance Rule, the GAAR does not adopt this rule because, as a public authority, the WRA will be bound by normal public law principles, including the requirement to act reasonably. A statutory bar on the WRA counteracting an arrangement, where it unreasonably considers that the arrangement is caught by the GAAR is unnecessary. 

TCMA/8060 The GAAR and WRA tax opinions

Where a taxpayer obtains a tax opinion from the WRA on the operation of the devolved taxes in accordance with the rules at WRA Tax Opinions Service then they should be able to rely upon the WRA view of the operation of the legislation based on the information that the taxpayer has provided.

The WRA will not provide a tax opinion on the application of the GAAR. If a request for a tax opinion references the application of the GAAR to a transaction we will disregard this element of the request in our response and set out our opinion on the tax consequences of the specific circumstances or transactions in the absence of the GAAR.

Furthermore, a taxpayer will not be able to rely on a WRA tax opinion where a view is sought in relation to one part of an arrangement, or in relation to one arrangement that is linked to other arrangements, which is intended or might be expected to achieve the avoidance of tax. In requesting an opinion a taxpayer must provide the full details of their transaction.

The Welsh Revenue Authority is committed to helping taxpayers pay the right amount of tax, at the right time. If a taxpayer has entered into an arrangement or is considering doing so and a devolved tax advantage might be expected to be a main benefit, we will provide an opinion on the technical aspects of that arrangement. We will not however give a view on whether it amounts to the avoidance of a devolved tax.

The WRA will not provide tax planning advice, nor opinions on speculative, hypothetical or “what if” requests.
A taxpayer cannot therefore rely on a tax opinion in respect of the application of the GAAR to a transaction. It remains the responsibility of the taxpayer to self- assess the transaction in respect of the GAAR. After a return has been filed, where appropriate the WRA may seek to apply the GAAR to the transaction, which could change the tax position.

Example 1 – GAAR does not apply - Extension of a long lease

A Ltd has leased a property to B Ltd, a connected person. B Ltd wishes to lengthen the lease (to 35 years) which is assumed to have a further term of 20 years. A Ltd could agree that in consideration of A Ltd accepting B Ltd’s surrender (and B Ltd’s agreement that it will take a lease from A Ltd) that A Ltd will grant B Ltd a new 35 year lease. A Ltd and B Ltd take tax advice and decide instead that A Ltd will grant a 15 year reversionary lease to B Ltd (that is, a 15 year lease which commences when B Ltd’s lease expires in 20 years’ time).

The arrangements

A Ltd agrees to grant a reversionary lease to B Ltd. The lease terms (apart from the commencement date) could be the same or A Ltd could choose to charge a higher rent under the new lease than it currently charges under the existing lease.

Accordingly, B Ltd holds 2 consecutive leases from A Ltd, one for 20 years and the 2nd for 15 years.

The relevant tax provisions

Sections 18 and 22, paragraph 5 of Schedule 4 and paras 7 and 17 Schedule 6.

The taxpayer’s tax analysis

The only LTT liability is on the rent payable under the new lease for the new term of 15 years.

Had the transaction been carried out by B Ltd surrendering to A Ltd and A Ltd granting a new lease for 35 years then the taxpayer would assert:

  • Para 17 Schedule 6 has the effect that the value of B Ltd’s existing lease which B Ltd surrenders is not consideration (a non-monetary premium) for the grant of the new lease by A Ltd and that the value of A Ltd’s promise to grant a new lease to B Ltd is not consideration for the surrender of B Ltd’s old lease. 
  • If the old lease had attracted LTT (or SDLT as provided in regulation 9 of the Land Transaction Tax (Transitional Provisions) (Wales) Regulations 2018) then it would only be due on the additional rent under the new lease compared with the amount paid under the old lease (if the old lease had attracted stamp duty no ’overlap relief’ would be available so that LTT would be due on 35 years rent).

As A Ltd and B Ltd are connected persons the consideration is not less than the market value and that the specific provision in paragraph 17 (providing that the new lease is not chargeable consideration for the surrender of the old lease and the value of the old lease does not constitute chargeable consideration for the new lease) has no effect. Furthermore, as para 7(2) Schedule 6 (“for the purpose of this Act”) means that the rent is taken to be reduced by the operation of paragraph 7, that is, LTT is charged on rent as reduced by any overlap relief.

The GAAR analysis

Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions?

The LTT provisions are designed to charge transactions where interests in land are acquired, whether by grant, transfer or surrender; and to impose LTT on the consideration provided for the grant or assignment of leases.

For the rent, it could be said that by structuring the new lease as a reversionary lease, LTT on the new lease is reduced as compared with the LTT that would have been payable under a new 35 year lease where the old lease had attracted stamp duty.

The taxpayer could argue that it has a choice under land law operating in Wales whether to surrender and obtain a re-grant of a 35 year lease or retain the old lease and obtain a new 15 year lease.

The decision whether to surrender and re-grant, while it could be said that the policy objective is to impose LTT at a minimum by reference to market values where transactions are between connected persons, as a general rule (such as section 22) is subject to any specific statutory provision also dealing with consideration.

A reasonable view of these transactions is that they are consistent with policy and principles.

Do the means of achieving the substantive tax results involve one or more artificial arrangements?

  • Surrenders and re-grants, and the grant of reversionary leases as part of portfolio management, are not artificial steps

Are the arrangements intended to exploit any shortcomings in the relevant tax provisions?

  • No


On the facts, the arrangements are not such that the WRA would seek to apply the GAAR.

Example 2 – GAAR does apply - Higher rates residential property transactions (acquisition of freehold and grant of lease to effect arrangements to avoid tax)

This example is intended to provide an example of artificial tax avoidance arrangements.


The LTTA introduces higher rates of LTT for certain residential property transactions.

The arrangements

A Ltd acquires an major interest in a freehold dwelling (‘A dwelling’) on a new development. On the same day as it completes its acquisition of that interest it grants a lease for 22 years to B Ltd. A Ltd and B Ltd are unconnected but have a long but not interdependent business association. They both have substantial buy-to-let portfolios. B Ltd is also acquiring a near identical dwelling (‘B dwelling’) on the new development. It times its completion of its dwelling to fall on the same day as A Ltd’s completion. On the same day it grants a lease to A Ltd for 22 years.

At the end of the effective date of the 4 transactions A Ltd has a 22 year lease in B dwelling, and a reversionary freehold interest in A dwelling, and B Ltd has a 22 year lease in A dwelling, and a reversionary freehold interest in B dwelling. The granting of the leases is at a peppercorn rent. However, as they are an exchange, one lease is entered into in consideration for the other, the chargeable consideration for the leases will be the market value of the leases.

The terms of the leases include clauses that provide that where one lease is surrendered or disposed of that the other lease must be surrendered for the same consideration as the surrender or disposal of the lease achieved. They also contain clauses that ensure the dwellings are returned in good condition.

The freehold dwellings cost A Ltd and B Ltd £150,000 each (tax at higher rates £4,500, tax at normal rates zero). The leases have, given the peppercorn rent, a market value for the premium of £60,000 (tax at higher rates £1,800, tax at normal rates zero).

A Ltd seeks to find a tenant for B dwelling and B Ltd seeks a tenant for A dwelling.

The relevant provisions

Paragraph 20(2) of Schedule 5, section 16 and paragraph 5 of Schedule 4

The taxpayer’s tax analysis

The taxpayers contend that they are liable to tax on the LTT higher rates only on the purchase of the leases and not on the freehold acquisitions. This is because at the end of the effective date the acquisition is subject to a lease held by an unconnected person and that lease has an unexpired term of more than 21 years.

A Ltd therefore contends that it is liable to tax on the acquisition of the freehold at normal rates (zero) and on the acquisition of the lease at LTT higher rates (£1,800). B Ltd contends that its tax position is identical. 

The GAAR analysis

The WRA considers that the GAAR will be triggered. The arrangements are tax avoidance arrangements as the obtaining of the tax advantage (the reduction of a charge to tax) was, at the very least, certainly one of the main reasons (and probably the main reason) for the arrangements.

Those arrangements are also are also artificial arrangements that lack genuine commercial substance. The acquisition of the freehold interests have genuine commercial substance, whereas the peppercorn rent leases (even when the market value of the premium is taxed as chargeable consideration) do not have commercial substance. They are risk free (in that if A Ltd is unable to let B dwelling it incurs no rent payments and has paid no premium – it is in the same position as if it had retained its unencumbered interest in A dwelling and had been unable to let that property).


On the facts, the arrangements are such that the WRA would seek to apply the GAAR.

The application of the GAAR to in this case would result in A Ltd and B Ltd being taxed on the acquisition of the freehold interest of A dwelling and B dwelling respectively (a liability to LTT of £4,500 each rather than £1,800 each). The transactions related to the leases will be ignored for LTT purposes.

TCMA/8070 The GAAR and other devolved tax rules

The GAAR is designed to counteract tax advantages which arise as a result of the artificial tax avoidance arrangements that have been used by the taxpayer. The WRA must therefore conclude that the arrangements are artificial before taking action to counteract the tax advantage using the GAAR.

It is likely that a taxpayer will already be under enquiry before the WRA will advance an argument that the taxpayer has potentially triggered the GAAR. The WRA, prior to advancing arguments under the GAAR, may have already advanced arguments under other areas of the devolved taxation legislation to challenge the tax result the taxpayer has sought to achieve. Therefore, in such enquiries the WRA may run a number of arguments with different tax results and, potentially, with different taxpayers being liable to the tax (depending upon the arrangements in question).

There may be some arrangements which appear to be so clearly artificial that it would be appropriate for the WRA to commence its enquiry with the intention of demonstrating that the GAAR has been triggered. This may be the case where evidence emerges that a taxpayer has entered into the same arrangements as another taxpayer (for example if an avoidance scheme has been mass marketed) and a GAAR challenge is already running in that other enquiry.

Whilst multiple arguments based on other areas of the devolved tax legislation may be possible, the WRA can choose to use only a GAAR challenge. A taxpayer cannot object to the use of the GAAR simply because other means available to the WRA to challenge the artificial arrangement have not been used.

Other statutory provisions relating to devolved taxes contain specific anti-avoidance rules. Some of these are known as targeted anti-avoidance rules (TAARs), while others may take the form of less explicit anti-avoidance protection. In relation to LTT, the most significant is the rule at section 31 LTTA which is targeted to stop claims using tax avoidance arrangements to access the relief.

The GAAR is independent of the other anti-avoidance rules, and it might be used to challenge an artificial arrangement which was itself contrived to exploit a defect, or perceived defect, in the other anti-avoidance rules.

TCMA/8080 Commencement of the GAAR and the Transitional rule

The GAAR will only apply to those tax avoidance arrangements entered into on or after the date on which the GAAR came into force. This is 1 April 2018.

This means that the WRA cannot consider or have regard to any arrangements entered into before that date to make a challenge using the GAAR. However, other challenges using other parts of the Welsh Taxes Acts may still be possible.

Conversely, a taxpayer will be able to have regard and make reference to arrangements entered into before 1 April 2018 if that will assist the taxpayer in showing that the tax avoidance arrangements were not artificial.

TCMA/8090 How will the WRA counteract an advantage?

If the WRA considers that an arrangement is artificial and that the GAAR is to be used to counteract the tax avoidance arrangements, whether alone or together with other challenges to the arrangements (for example a specific TAAR), then the WRA must follow the procedures set out in the GAAR legislation. 

Section 81E TCMA 2016 sets out that any adjustment made by the WRA must be just and reasonable to counteract the tax advantage. In most cases this should be a relatively straightforward task to decide what adjustments need to be made to achieve that just and reasonable result. For example, in LTT where a taxpayer has entered into tax avoidance arrangements that have reduced their liability to zero, where consideration given for the subject matter of the land transaction would have resulted in a liability of £100,000, then the £100,000 liability will be sought through the counteraction notice.

However, if the tax avoidance arrangements were complicated then there may be a number of points at which the GAAR could result in a tax charge. If the WRA were to seek the tax charge at each point the tax result could be greater than if the artificial arrangements had not been entered in to at all. Using the LTT example in the previous paragraph if the tax avoidance arrangements resulted in multiple transactions (each of which the taxpayer contended resulted in a zero liability) then, had the taxpayer not entered in to the arrangements and had simply acquired the property from the seller directly, then the WRA will not seek tax for each and every transaction arising from the arrangements but will seek to tax the most likely or appropriate alternative transaction. That alternative transaction or arrangement may not be the one that would result in the highest tax charge.

In order to protect its position, the WRA may make more than one counteraction, with associated assessments and closure notices. This is because, in the event of appeal, the WRA may wish to present the tribunal with alternative tax consequences and, even, potentially different persons bearing the liability to tax. Ultimately the WRA must ensure that the adjustments do not involve any element of double taxation (whether for the taxpayer who carried out the artificial transaction(s), or when taking account of the tax liabilities of other persons).

TCMA/8100 The GAAR and self-assessed tax regimes

The devolved taxes are self-assessed taxes; the taxpayer assesses and informs the WRA what their tax liability is through a return. The GAAR forms part of the legislative framework for the devolved taxes. As the devolved taxes operate on a basis of self-assessment, taxpayers are required to take the provisions of the GAAR into account when completing their tax returns.

TCMA/8110 The GAAR and penalties

The Welsh Taxes Acts do not include any specific provisions imposing penalties counteracted by the GAAR. However, under the general principles of self-assessment, a taxpayer has a duty to submit a correct tax return.

Therefore, if a taxpayer considers that they have entered into arrangements that are artificial, then their tax return must make an appropriate adjustment to reflect the fact that the GAAR is applicable. Failure to make an appropriate adjustment could mean the taxpayer has committed an offence by submitting a return containing inaccuracies and they are liable to a penalty on the inaccuracy.

A taxpayer who is uncertain whether an arrangement is within the scope of the GAAR may wish to contact the WRA at the time the return is submitted, indicating the uncertainty. In such circumstances, the taxpayer is advised to make a full disclosure of all the relevant facts. Whilst penalties for inaccuracies may still be due, depending upon the specific facts of the tax avoidance arrangements, the full disclosure of the facts may provide grounds for mitigation of any penalty chargeable. The penalty will be based on the potential lost revenue as a result of the tax avoidance arrangements.

In the event that tax avoidance arrangements have been implemented incorrectly, so that the tax advantage that was sought by entering into the arrangements could not been achieved, then penalties for inaccuracies in the return will, where appropriate, be sought.

TCMA/8120 Counteraction notices

The WRA must follow the procedure set out in sections 81E to 81G when using the GAAR to counteract tax avoidance arrangements. In many enquiries the use of the GAAR may be one of a number of arguments advanced by the WRA to challenge the taxpayer’s self-assessment. Furthermore, the decision to advance GAAR arguments may come at a point in an enquiry when the WRA has already made an assessment based on technical arguments rather than the GAAR.

Whilst there is a need to use the counteraction notice procedure, the tax charged will continue to be assessed through a closure notice where there is an open enquiry, or by a WRA assessment. It is therefore important that when making the closure notice that all alternative tax results are fully set out. It is also possible, when considering making an assessment or a determination, for the WRA to consider whether the taxpayer may have entered into tax avoidance arrangements that the WRA may want to challenge using the GAAR.

TCMA/8130 Proposed counteraction notice

The WRA must issue the taxpayer with a proposed counteraction notice which states that the WRA considers a tax advantage to have arisen from an artificial tax avoidance arrangement and that the tax advantage is to be counteracted by an adjustment effected either by assessment or a closure notice.

The proposed counteraction notice must:

  • specify the tax avoidance arrangement and the tax advantage,
  • explain why the WRA considers that a tax advantage has arisen from the artificial tax avoidance arrangement,
  • set out the WRA proposed adjustments to counteract the tax advantage, and
  • specify the amount that the taxpayer will be required to pay in accordance with the proposed assessment (this should include tax arising under the GAAR counteraction and any other tax arising from other the WRA action, for example challenges to other aspects of the taxpayers affairs)

The proposed counteraction notice must also inform the taxpayer:

  • that a final counteraction notice will be issued after the expiry of a period of 45 days from the date of issue of the proposed counteraction notice,
  • that the taxpayer can ask the WRA to consider extending that 45 day period, and
  • that the taxpayer may make written representations at anytime in that 45 day (or as extended) period

The provision of the 45 day period for the taxpayer to make written representations is to enable the taxpayer to challenge the WRA conclusions that an artificial tax avoidance arrangement has given rise to a tax advantage. Following the expiry of that period, and if the WRA’s view has not been altered by the taxpayers written representations, then the WRA issue a final counteraction notice.

TCMA/8140 Final counteraction notice

Once the 45 day period (or the extended period agreed by the WRA) following the issue of the proposed counteraction notice has expired the WRA must issue a final counteraction notice to the taxpayer if the WRA still considers that a tax advantage has arisen as a result of artificial tax avoidance arrangements.

The WRA, where it has issued a proposed counteraction notice, must issue a final counteraction notice stating whether the tax advantage arising from the tax avoidance arrangement is to be counteracted by either a closure notice or a WRA assessment. This means that even where the WRA accepts the taxpayer’s return is not subject to the GAAR (perhaps because of the written representations) the WRA must issue a final counteraction notice confirming that action under the GAAR is not to be pursued.

If the WRA does consider that the tax advantage should be counteracted by the GAAR then the final counteraction notice must also:

  • specify the adjustment required to give effect to the counteraction,
  • set out the amendment necessary, where the adjustment relates to a return that is under enquiry, to be included in the closure notice,
  • where the tax advantage is not to be counteracted through a closure notice, an assessment must be made at the same time as issuing the notice, or an assessment already made must be identified as giving effect to the counteraction, and
  • specify the amount of tax that must be paid as a result of the amendment required or assessment

TCMA/8150 Taxpayer appeals

The GAAR proposed or final counteraction notices are neither reviewable nor appealable decisions. This is because the notices themselves do not create a tax liability. The closure notice or the assessment issued to give effect to the counteraction notice are reviewable and appealable decisions.

In any case that is heard before the tribunal it will be for the WRA to demonstrate that there is an artificial tax avoidance arrangement and that the adjustments made (or to be made) to counteract that arrangement are just and reasonable.

TCMA/8160 GAAR transitional arrangements

Where there is an amount that is chargeable to a devolved tax then the provisions of the GAAR will apply except where the tax avoidance arrangement was entered into on a date prior to the date on which the GAAR rules came into force.

However, if any arrangement entered into before the date that the GAAR rules came into force are indicative that the arrangements were not artificial then those arrangements are not to be ignored.

TCMA/8161 Appendix 1

  1. In Inland Revenue Commissions v Brebner ([1967] 2 W.L.R. 1001), the Court of Appeal considered whether a tax advantage was “one of the main objects” of entering into an arrangement:

    “… when the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less, tax - it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence.” [at p 718-9]

  2. In Commissioners of Inland Revenue v Trustees of the Sema Group Pension Scheme ([2002] EWHC 94 (Ch). The extract was subsequently approved by the Court of Appeal in [2002] EWCA Civ. 1857 at paragraph 119.), the High Court was asked to consider whether “one of the main objects” of entering into an arrangement was to obtain a tax advantage:

    “The tax advantage may not be a relevant factor in the decision to purchase or sell or in the decision to purchase or sell at a particular price. Obviously if the tax advantage is mere “icing on the cake” it will not constitute a main object. Nor will it necessarily do so merely because it is a feature of the transaction or a relevant factor in the decision to buy or sell. The statutory criterion is that the tax advantage shall be more than relevant or indeed an object; it must be a main object.” [at para. 53]

  3. More recently, in Versteegh Ltd and others v Commissioners for Revenue and Customs ([2013] UKFTT 642 (TC)) the First-tier Tribunal whether a tax advantage was a “main purpose or one of the main purposes” of the taxpayer entering into the arrangement:

    “In the same way that the mere presence of a commercial purpose cannot rule out the existence of tax avoidance as being a main purposes, the mere existence of a tax advantage, known to the taxpayer, does not on its own render the obtaining of that advantage a main purpose. All the authorities point to the question being one of degree and significance to the taxpayer, and that the question is one of fact for the tribunal, having regard to all the circumstances.” [at para. 158]

  4. In UBS AG v Commissioners for Revenue and Customs ([2016] UKSC 13), the Supreme Court considered whether to interpret provisions in income tax legislation to lead to tax-free bonuses awarded by various banks in 2004 in such a way to enable them to be regarded as a means of avoiding income tax:

    “There is nothing in the background to suggest that Parliament intended that [the provisions allowing for the award of tax-free bonuses] should also apply to transactions having no connection to the real world of business, where a restrictive condition was deliberately contrived with no business or commercial purpose but solely in order to take advantage of the exemption.” [para 78]