The self-assessment deadline is fast approaching, and for individuals with multiple income streams, accurately reporting their income and navigating the complexities of the tax system can be a daunting task. One area of particular concern for taxpayers is HMRC’s General Anti-Abuse Rule (GAAR).
GAAR was designed to counter tax avoidance schemes. It allows HMRC to challenge and potentially deny tax advantages obtained through artificial or contrived arrangements that lack commercial rationale. Essentially, GAAR aims to prevent taxpayers from exploiting loopholes or structuring their affairs in ways that circumvent the spirit of tax legislation. In short, think Jimmy Carr.
Individuals with diverse income sources, such as employment income, rental income, investment income, and income from self-employment, may find themselves more susceptible to scrutiny under GAAR. This is because complex financial arrangements can sometimes be interpreted as attempts to artificially reduce tax liabilities.
The sort of things that might trigger GAAR might include:
Artificial tax losses: An individual engaging in transactions primarily to generate artificial tax losses that can be offset against other income stream.
Exploiting mismatches in tax treatment: Trying to exploit differences in how different types of income are taxed. For example, they might attempt to artificially convert employment income into capital gains, which are generally taxed at lower rates.
Complex structures with no commercial purpose: Entering into complex financial structures that lack any genuine commercial purpose beyond minimising tax liabilities.
Tax efficiency is all very well, but doing so in ways that don’t attract unwarranted attention. We’d suggest guidance from an expert team on that. We can help you understand both the letter and the spirit of the law: While it’s important to minimise tax liabilities, it’s equally important to ensure that all tax planning strategies are consistent with the spirit of the law and have a genuine commercial purpose.
But, if HMRC believes a transaction falls foul of GAAR, they will typically issue a notice of enquiry. This initiates an investigation process where taxpayers will need to provide detailed information and documentation to support their position. If that happens, you know where we are…