We may take counteraction under the Scottish GAAR against any tax avoidance arrangement (see RSTP8004) which we consider to be artificial. A tax avoidance arrangement is artificial if one or both of two conditions (A or B) are met.
Condition A is met if, in all the circumstances, entering into or carrying out the arrangement is not a reasonable course of action in relation to the tax legislation in question.
Relevant factors in leading us to decide that the course of action is not reasonable in all the circumstances (and therefore is artificial) would be:
- if the substantive results of the arrangement:
- are not consistent with any principles on which the tax legislation in question is known to be based (whether express or implied); and
- the results are not consistent with the policy objectives of that legislation.
In identifying the policy objectives of legislation, reference may be made to (but is not limited to) any relevant oral or written statements/publications made by or on behalf of the Scottish Ministers, such as statements before the Scottish Parliament and published material accompanying the legislation in question.
To this end we direct you to the Scottish Parliament archive pages for the Land and Buildings Transaction Tax (Scotland) Bill, the Landfill Tax (Scotland) Bill, and the Revenue Scotland and Tax Powers Bill. These pages include the accompanying documents for each Bill (of principal relevance are the Policy Memoranda and Explanatory Notes) and also link to relevant debates in the Scottish Parliament Official Report and relevant correspondence on the legislative provisions.
For both primary and secondary legislation we direct you to the legislation.gov.uk portal which includes finalised Explanatory Notes and, in the case of secondary legislation, Scottish Government Policy Notes.
- if the arrangement is intended to exploit any shortcomings (‘loopholes’ including perceived loopholes) in the tax legislation in question.
These are not exhaustive and we can take account of other factors in determining whether or not the course of action taken was reasonable in relation to the tax legislation.
Condition B is met if the tax avoidance arrangement lacks economic or commercial substance.
Examples of characteristics of a tax avoidance arrangement that could indicate that an arrangement lacks economic or commercial substance are where:
- the arrangement is carried out by a person in a manner which would not normally be employed in reasonable business conduct;
- the legal characterisation of the steps in the arrangement is inconsistent with the legal substance of the arrangement as a whole;
- elements in the arrangement have the effect of offsetting or cancelling each other out;
- the transactions are circular in nature; or
- the arrangement results in a tax advantage that is not reflected in the business risks undertaken by the taxpayer.
When something is not artificial
An example of something that might indicate that the tax avoidance arrangement is not artificial is where the tax avoidance arrangement accords with established practice and, at the time it was entered into, we had clearly and unequivocally indicated that we accepted this practice (whether in this guidance or by some other means, for example a considered public response by a senior Revenue Scotland official).
In the context of the conveyancing process, the practices followed by Scottish solicitors are relatively standardised and practices which align with the expectations of bodies such as the Law Society of Scotland and the Council of Mortgage Lenders will usually be regarded by us as established practice.
This example is not exhaustive. We can take account of other factors which might indicate that a tax avoidance arrangement is not artificial.
Tax avoidance arrangements forming part of other arrangements
Where a tax avoidance arrangement forms part of any other arrangements, in determining whether it is artificial or not these other arrangements must be considered unless they were entered into before 1 April 2015, in which case they will not be considered.
However, the earlier arrangements will be taken into account (irrespective of the date they were entered into) if, as a result of taking them into account, the tax avoidance arrangement would not be artificial.