November 2014 – “GAAR or GRRR?”

Author: Mitchells Roberton
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George Osborne

  • The Chancellor of the Exchequer when opening the Budget on 21st March 2012, said:

“The Government will … accept the recommendation of the Aaronson Report that a General Anti-Abuse Rule (GAAR) targeted at artificial and abusive tax avoidance schemes would improve the UK’s ability to tackle tax avoidance while maintaining the attractiveness of the UK as a location for genuine business investment. The Government will consult with a view to bringing forward legislation in Finance Bill 2013.”

  • That is now water under the bridge in that we now have in place a UK General Anti-Abuse Rule targeting artificial and abusive tax avoidance schemes (“the UK GAAR”).

The Scottish GAAR

  • For Scotland, the Revenue Scotland and Tax Powers Act 2014 was passed by the Scottish Parliament on 19th August this year. This provides, in particular, for a Scottish general anti-avoidance rule (“the Scottish GAAR”). This is somewhat wider in scope than the UK GAAR and will be applied by Revenue Scotland, the new Scottish tax authority, “for the purpose of counteracting tax advantages arising from tax avoidance arrangements that are artificial.”
  • The December 2013 Policy Memorandum in relation to the Act had this to say (at para. 11) about the Scottish GAAR:

“ The Scottish GAAR would enable Revenue Scotland to take counteraction in a wider range of circumstances than the existing UK GAAR (which deals with tax abuse rather than tax avoidance). This is a result of the criteria used in the Scottish GAAR to define what constitutes a tax avoidance arrangement that is artificial … Artificiality will be determined by reference to a set of tests set out in the Bill, including commercial substance.”

  • Of course, the Scottish GAAR will only apply in relation to those taxes that are “devolved” to the Scottish Parliament and not those “reserved” to the UK Parliament.

The Smith Commission


  • Even more recently, on 27th November, the Smith Commission Report has been published.  Paragraph 94 of the Report says:

“Scotland’s Fiscal Framework


94. The devolution of further responsibility for taxation and public spending, including elements of the welfare system, should be accompanied by an updated fiscal framework for Scotland, consistent with the overall UK fiscal framework.”

  • This, together with the First Minister’s rather lukewarm reaction to the Report, suggests that the Scottish GAAR may take on an increasing significance.

What this Note is (and is not) about


  • This Note is not aimed at discussing the terms of the UK GAAR or the Scottish GAAR. It will simply look in outline at one particular example from the extensive guidance on the UK GAAR produced by HM Revenue and Customs (“the HMRC Guidance”). No equivalent guidance has yet been published by Revenue Scotland for the Scottish GAAR. When it is it may be interesting to compare the two.


  • One of the main purposes of the HMRC Guidance is said to be as an aid to the interpretation and application of the UK GAAR, by “discussing its purpose, considering particular features of the GAAR and, where appropriate, illustrating that discussion by means of examples.” We turn now to one of the many examples in the HMRC Guidance.

Background and example


  • As many will know, there is relief from “capital gains tax” (“CGT”) where an individual sells his or her home or “main residence”. The policy behind the relief is, where property prices are generally rising, to prevent the proceeds of sale of a home – which will typically be invested in a new home – from being eaten up by CGT.
  • Some individuals however have more than one “residence”. So it may be necessary to determine which of two (or more) residences is a person’s “main residence” for these purposes. The relevant legislation here provides that within two years of acquiring a new residence a person may “elect” which of two or more residences is his or her “main residence” for CGT purposes.
  • This election may be made for any residence irrespective of the fact that, viewed objectively, one residence is clearly more central to the individual’s life than the other. The following example (from the HMRC Guidance) illustrates how the scope for making such an election may work to the taxpayer’s advantage.
  • It should be noted however that the example given below relates to CGT. This is not one of the taxes “devolved” to the Scottish Parliament and the Smith Commission Report does not suggest it should be. The Report says (at para. 81):  “all aspects of Inheritance Tax and Capital Gains Tax will remain reserved” to the UK Parliament.


  • Harry who lives 10 months of the year in his home in Manchester, acquires a holiday home in Cornwall. The holiday home is not let out and Harry spends 2 months of the year there. Harry keeps a number of possessions in the Cornwall house and HMRC accepts that the Cornwall house can be considered a residence.
  • Within 2 years of acquiring the Cornwall house, Harry notes that property prices in Cornwall are rising significantly and believes that he may sell the house within the next few years. He therefore makes an election – backdated to the date of purchase – to treat the Cornwall house as his main residence even though, viewed objectively, the Manchester house is the centre of Harry’s life. Harry sells the Cornwall house 4 years later making a large capital gain. The capital gain is exempt from CGT.
  • Some perhaps might feel that Harry was being a bit nifty: after all the CGT exemption is primarily aimed at exempting from CGT any gain on your home – rather than your holiday house. Nevertheless, the HMRC Guidance is wholly relaxed about what Harry has done. In discussing Harry’s case it concludes:

“[Harry’s example] is entirely uncontroversial and a long way from the type of … planning which the [UK] GAAR seeks to target. The inclusion of [this] example should not suggest that facts along these lines are even close to the GAAR borderline.”

  • Some might find that conclusion a little surprising. But the fact is the legislation expressly allows for such “elections” being made by those who, like Harry, have holiday homes. Nevertheless, in cases nearer the “GAAR borderline”, it will be interesting to see to what extent the Scottish GAAR Guidance (when available) takes a different approach.

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Neil Mackenzie:

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