For the GAAR to apply there must be a tax advantage that arises from tax arrangements that are abusive. “Arrangements” are widely defined and include an agreement, understanding, scheme or transaction. The term “tax advantage” includes a relief, avoidance or deferral of tax. “Tax arrangements” simply means that a main purpose of the arrangements is to achieve a tax advantage.
The GAAR will only apply if those tax arrangements are “abusive” – this is defined in a rather awkward and hard to understand way. Basically, the tax arrangements will be abusive if they cannot reasonably be regarded as a reasonable course of action. This is called the double reasonableness test and it is for HMRC to show that the arrangements are abusive. In other words, the tax tribunal will need to be persuaded that no reasonable person could regard the arrangements as reasonable to carry out.
If the GAAR applies then the arrangements can be counteracted by way of adjustments to the taxpayer’s tax position to remove the tax advantage claimed and penalties are likely to apply.
The intention behind the GAAR is to deter aggressive tax planning in the first place and the publication of opinions issued by a panel of tax experts known as the GAAR Advisory Panel will over time create a body of practical guidance on what type of arrangements are likely to fail the double-reasonableness test.