Guidance from Anti-Avoidance Group

Risk assessing: factors which may indicate avoidance

When risk assessing cases, HM Revenue & Customs (HMRC) officers will identify a variety of risks which may require a closer look. Anti-Avoidance Group (AAG) has drawn up a list of common features of transactions or arrangements, known as signposts, which have been identified as unacceptable in the past. It is not an exhaustive list since the nature of risk is constantly changing due to developments in markets and changes in taxpayer behaviour. Building on this, AAG also supports the risk assessment process by providing advice to operational colleagues in respect of particular cases, either confirming that something is innocuous thereby preventing wasted effort in pursuing it; or providing advice on how to address transactions or arrangements that HMRC may see as unacceptable tax planning. HMRC must stress that not all transactions or arrangements which display one or more of the signposts will turn out on closer scrutiny to be avoidance. Innocuous transactions will occasionally display one or more of the features. AAG will keep this list of signposts under review.

The aim of this guidance is to promote an effective and consistent approach to dealing with risks arising from tax planning. This guidance is made available to you, HMRC customers, so that you can better understand how HMRC address these risks. It is in line with the HMRC goal from the Varney Review to implement an efficient risk-based approach to dealing with tax and customs matters which will lead to high risk issues being identified and resolved more quickly.

List of Signposts

  • Transactions or arrangements which have little or no economic substance or which have tax consequences not commensurate with the change in a taxpayer’s (or group of related taxpayers’) economic position. For example:
    • Forex matching abuse where the position is flat in economic substance but the benefit of hindsight can be used to choose which of two equal and opposite positions is taxed.
    • the arrangements in Ramsay (WT) Ltd v CIR (54TC101) or University of Huddersfield (C-223/03).
  • Transactions or arrangements bearing little or no pre-tax profit which rely wholly or substantially on anticipated tax reduction for significant post tax profit. For example:
    • Dividend buying where the value of foreign tax credit more than offsets a pre-tax loss.
    • Contrived Gilt Strip losses counterbalanced by gains on exempt assets such as options.
  • Transactions or arrangements that result in a mismatch such as: between the legal form or accounting treatment and the economic substance; or between the tax treatment for different parties or entities; or between the tax treatment in different jurisdictions. For example:
    • rent factoring such as in John Lewis Properties Ltd v CIR (75TC131)
    • conditional share schemes to disguise a cash bonus as a dividend
    • arrangements such as those in CIR v Cleary (44TC399) or MacDonald v Dextra Accessories Limited (2005 UKHL 47)
    • a transaction where a payment is treated as an expense in one jurisdiction but the corresponding receipt is not taxable income in another jurisdiction.
  • Transactions or arrangements exhibiting little or no business, commercial or non-tax driver. For example:
    • Arrangements such as those in BUPA Hospitals (C-419/02) or Debenhams (2005 EWCA Civ 892)
    • Film schemes which create tax losses in excess of the genuine commercial investment.
  • Transactions or arrangements involving contrived, artificial, transitory, pre-ordained or commercially unnecessary steps or transactions. For example:
    • Acombination of options designed to generate a tax loss without any economic loss, such as considered in IRC v Scottish Provident Institution ([2004] UKHL 52; [2005] STC 15).
    • Arrangements such as those in Furniss v Dawson ([1984] A.C. 474); Halifax and others (C-225/02).
    • The use of artificial arrangements designed to take assets out of the inheritance tax regime while allowing the former owner to continue to enjoy the benefits of ownership.
  • Transactions or arrangements where the income, gains, expenditure or losses falling within the UK tax net are not proportionate to the economic activity taking place or the value added in the UK - especially where the transactions or arrangements are between associates within the same economic entity and would not have occurred between parties acting at arm's length and/or add no value to the economic entity as a whole. For example:
    • The transfer of ownership of an income stream from a UK resident company to an associated company resident in a low/no tax jurisdiction in circumstances where the economic activity giving rise to the income does not accompany the transfer of ownership and/or where no economic benefit accrues to the economic entity as a whole.
  • Tax law is sometimes enacted to target particular transactions or arrangements and give them a particular tax result. Alternative transactions or arrangements designed to sidestep the effect of such legislation, but which otherwise achieve the same result, constitute a signpost. For example:
    • Arrangements designed to give the same effect as a share redemption without constituting one in law to frustrate the operation of section 91A or 91B FA 1996 (shares treated as debt).