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In the United Kingdom, a sufficient condition in determining whether an individual's tax arrangements are abusive is the double reasonableness test in GAAR. This states that tax arrangements will be considered abusive if they:

cannot reasonably be regarded as a reasonable course of action

Clearly, given its name as the "double reasonableness test", the use of both "reasonably" and "reasonable" is intentional. However, it is unclear to me what the impact of this is. In particular, what would the impact be if the above rule were replaced with a rule stating that tax arrangements are considered abusive if they:

do not constitute a reasonable course of action

It looks, to me, like the outcomes should be identical under both tests.

To make my point more concrete, contrast the above with the following examples of a "single" reasonableness test:

  • An individual attempting to rely on self-defence must show that the force they used was reasonable in the circumstances (s3(1) Criminal Law Act 1967)

  • The standard of care considered in negligence is whether the defendant's act or omission met the standard of care of a reasonable person in their position (Blyth v Birmingham Waterworks (1856))

Both of the above could be modified into double reasonableness tests (eg for self-defence: "could the defendant's conduct be reasonably regarded as being reasonable in the circumstances"), but they have not.

Therefore, my question asks what the difference is when considering the double reasonableness test and the more typical "single" reasonableness test?

Edit: Another way to think about my question is to split the question into two parts. If arrangements are reasonable, then clearly they will be reasonably be regarded as reasonable. However, the subtlety concerns an action that isn't actually reasonable, but is reasonably regarded as reasonable in spite of this. My question asks if such an action exists. If not, then it would appear that double reasonableness is redundant.

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    I suppose it does rule out silly arguments like "My lord, I regarded it as a reasonable course of action to take off all my clothes and ride my bicycle into the river. But then again, I had just drunk 17 pints of beer." They did regard it as a reasonable course of action, but not reasonably. It sounds like there's more to the test than that, but I don't know what. Commented Oct 12 at 22:49
  • @FD_bfa: The "single reasonable" self-defence standard doesn't just require that the force used can be regarded as reasonable, it requires that it was reasonable. That's not subject to the argument above. Whether the force is reasonable is unrelated to whether any particular person regarded it to be reasonable. Commented Oct 13 at 1:28
  • So I think it definitely makes a difference if you just omit the bolded "reasonably". What's less clear is how it changes if you replace the whole sentence with "it must be shown that the tax arrangements were a reasonable course of action". Commented Oct 13 at 1:29
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    @NateEldredge In the UK, the reasonableness test (unless expressly stated otherwise in the legislation) is always objective rather than subjective. That means that whether the actual person found it to be reasonable or not is irrelevant. Commented Oct 14 at 6:47

2 Answers 2

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The effect is to widen the net of what can pass the reasonableness test. Let's rewrite the legislation so that it uses a single reasonableness test:

Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as [are not] a reasonable course of action in relation to the relevant tax provisions

When faced with this the court asks itself: would a reasonable person (AKA a "man on the Clapham omnibus") consider the course of action to be reasonable? If yes, the arrangements are not abusive. If no, they are abusive.

In order to do that, the court has to first invent this fictional reasonable person and ask itself which range of actions the person would believe is reasonable, then see if the particular course of action fits within that range. For example, if there are 10 different possible courses of action, the court might decide that the reasonable person considers 3 of them to be reasonable:

 Reasonable Person A
       | | |
       V V V
1 2 3 [4 5 6] 7 8 9 10

To put it another way, the opinion of what range of actions are reasonable is the opinion that the judge thinks a reasonable person would hold. The important thing is that it's a single hypothetical reasonable person that the court has invented. This means it inevitably includes some bias because it's what the judge imagines he would find reasonable if he placed himself into the shoes of this person. Different judges might invent slightly different reasonable people with different ranges of opinions.

It's helpful to consider what would happen if the court's decision is appealed. Let's say the particular course of action was 7. It fails the test at first instance because it sits outside the range of reasonable actions in the view of Reasonable Person A. The appellate court takes a different view of what opinions a reasonable person would hold:

 Reasonable Person B
         | | |
         V V V
1 2 3 4 [5 6 7] 8 9 10

Provided that the first court's Reasonable Person A is genuinely a reasonable person (i.e. it's possible to imagine a reasonable person who might include 4, 5, and 6 in the list but would exclude 7) then the appellate court generally won't be able to overturn the first court's decision. The instance court was entitled to use Reasonable Person A for the test.

This is where the double reasonableness test changes things:

Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions

Now the court must ask itself: is there any imaginable reasonable person who would consider the course of action reasonable? If yes, the arrangements are not abusive. If no, they are abusive.

In this case, the appellate court can now overturn the first court's decision. The range of actions which are reasonable is the superset of every course of action that every possible reasonable person finds reasonable.

 Reasonable Person Superset
       | | | |
       V V V V
1 2 3 [4 5 6 7] 8 9 10

In practical terms this means that more borderline cases will avoid being found abusive where, with a single reasonableness test, they may have been found abusive. The intention of Parliament was to ensure that only obviously abusive arrangements are caught by the GAAR while merely using sophisticated tax planning should not be caught. The double reasonableness test attempts to implement this intention by having a very high threshold for an arrangement to be unreasonable.

A couple of caveats:

  1. I'm using a simplified version of the legislation to illustrate the point more clearly. In reality, Section 207 of the Finance Act 2013 contains various factors and examples that must be taken into account when applying the reasonableness test.
  2. This shouldn't be taken to imply that any arguable opinion will be found to be reasonable. For example, it's possible to imagine a libertarian who believes that taxes are inherently unfair because they amount to state-sponsored theft. This would nonetheless fail the test. While it might be "reasonable" in general for a person to hold this view as a political opinion, it's not a reasonable interpretation of the legislation.
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  • Another way to phrase it might be "if only unreasonable peoplle would consider it reasonable". Commented Oct 13 at 15:33
  • Thank you for your answer (+1) – I will look through it properly in the next few hours (just a quick observation, I think s107 FA 2013 in your caveat is perhaps meant to be a different reference, as it appears to just be defining "chargeable interests") Commented Oct 13 at 16:11
  • @FD_bfa Thanks for spotting that, fixed. Commented Oct 13 at 16:35
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As a double test

Double reasonableness tests are not unique to tax law. The most familiar is the test for apprehended bias - where a reasonable observer might think that a reasonable judge might not bring an independent mind to the case.

So, HMRC must prove that a reasonable observer would not think that a reasonable taxpayer would enter the scheme unless it was to avoid tax. That is, there are two distinct elements: 1. would a reasonable taxpayer enter into the scheme, and 2. would a reasonable observer consider that that was a legitimate thing to do. It raises the difficulty of proving that the scheme is a tax avoidance scheme.

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  • Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on Law Meta, or in Law Chat. Comments continuing discussion may be removed. Commented Oct 13 at 20:43

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