A GAAR penalty applies where a taxpayer submits a tax return on the basis that a tax advantage is obtained from tax arrangements that are subsequently counteracted under the GAAR by counteracting adjustments. The penalty is 60% of the counteracted adjustments.
The GAAR penalty makes the use of tax arrangements that might be at risk of counteracting adjustments potentially dangerous in terms of a possible costly penalty. Indeed, when a taxpayer receives a proposed counteraction notice from HMRC he will be under heavy pressure to take corrective action to prevent the matter from being referred to the GAAR Advisory Panel in order to avoid the risk of a penalty. This is because the taxpayer has 30 days to take the corrective action before the “closed period” starts and he will not be able to take corrective action to avoid the penalty until the final counteraction notice is confirmed.
In other words, a taxpayer who declines to take action in the face of a provisional counteraction notice and allows the matter proceed to the GAAR Advisory Panel is locked into the possibility of a 60% penalty if he eventually loses. The fact that such a penalty which is classed as “criminal” for the purposes of the Human Rights Act, is threatened prior to referral of the taxpayer’s case to the panel may breach the taxpayer’s rights under the Act and so it may be unenforceable.