The General Anti-Abuse Rule, the GAAR, is a guidance from the HMRC that forms part of the anti-avoidance framework of the UK. The GAAR aids in identifying abusive tax arrangements and provides HMRC a way of disputing tax arrangements that it views as avoidance.
Included in the GAAR is a process of purposefully vague counter-actions that should be followed to work against the advantages gained from abusive tax arrangements. Through providing purposefully vague guidance, by way of what is considered reasonable, a grey-area is produced that gives HMRC leverage in how to apply the GAAR to any given case.
The GAAR ruling therefore creates an opportunity for HMRC to perform case-by-case enquiries to clarify exactly where GAAr applies and does not apply; the HMRC has the ability to redefine the ruling into the future and how it is applied in practice. This is a flexible weapon. Any business embroiled in a GAAR case will be subject to a long and costly experience of drawn-out and complicated tax queries from HMRC. The GAAR therefore acts as deterrent to abusive tax arrangements by providing a general increase in complexity to tax law.
In addition, the GAAR contributes to the uncertainty of what might and can be considered abusive tax arrangements, which acts as a further deterrent to those wishing to abuse the taxation system. A further element of uncertainty, and therefore deterrent, is placed upon the taxpayer as it is the taxpayer who must decide if GAAR applies when completing tax returns.
HMRC can hold the taxpayer accountable for any failures in reasonableness of their tax arrangements as they must make a legally conscious decision as to whether what they have is reasonable. The HMRC can then decide if the arrangement is reasonable or not, encouraging genuine, reasonable and just behaviour in the taxpayer.