General anti-avoidance rule ‘not aimed at contractors’

Fears that a general anti-avoidance rule may police contractor employment status, as an alternative or add-on to IR35, are totally unfounded, although the ‘GAAR’ is set for the Budget on March 21^st.

Issued exclusively to CUK, the majority verdict came last night from three leading contractor tax experts - John Whiting of the Chartered Institute of Taxation, Paul Mason at Abbey Tax and Martin Hesketh of Brookson.

Their consensus is that the GAAR, as outlined by Graham Aaronson QC who explored its pros and cons, is likely to be accepted by George Osborne at Budget 2012, yet not because the chancellor wants it applied instead of IR35, or alongside it.

It effectively rebuffs the growing number of blog posts, Tweets and even ‘news’ items that suggest GAAR is a means to ‘clean up’ disguised self-employment where IR35 can’t or, if the IR35 Forum recommends, shouldn’t.

Momentum behind this reportage increased earlier this month, with comments from both David Cameron and Nick Clegg to business owners and the BBC, respectively, each on the same day.

The prime minister said: “I think we need a tougher approach, one of the things we’re going to be looking at this year is whether there should be a more general anti-avoidance power that HM Revenue & Customs can use”.

Speaking to Radio 4, the deputy PM sounded more committal on timing: “We have received a report... which says an anti-abuse rule is feasible. I very much hope... [that] we can make progress on that in the Budget.”

Unifying their separate comments are the envisioned targets: Mr Cameron said “particularly wealthy individuals and bigger companies” and Mr Clegg said the “wealthy elite” with “an army of accountants.”

All taxpayers may now try to decide for themselves if, as an individual, they are within those crosshairs which, says shadow exchequer secretary to the Treasury Owen Smith, are too “narrowly focussed.”

For better or worse, such a specific framing means the GAAR in its envisioned form has no direct correlation to contractors, as far as they are an identifiable group by their tax or employment status.

“I do not think contractors need to worry about the GAAR when it comes to employment status unless they are using some very artificial structure,” said John Whiting, a director at CIOT.

“We are likely to see the GAAR concept taken forward in the coming Budget… [but] I cannot see that it would be used to target, for example, the simple issue of deciding to work through a company.

“Similarly,” added Mr Whiting, who was speaking outside his role as tax director at the Office of Tax Simplification, “I don’t see that a GAAR would police employment status as such – surely case law will continue to do that.”

In other words, the anticipated GAAR is “unlikely to have a direct impact on the majority of contractors”, explains Brookson’s Martin Hesketh, “- [workers] who [may or may not] inadvertently break tax rules during the course of their work.”

Paul Mason, contracts manager at Abbey Tax, a specialist in IR35 compliance confirmed:  “I am not sure that the GAAR is going to affect contractors,” he said, “unless they are looking at the offshore trust-type of arrangements.”

Even the Treasury-commissioned GAAR Study lays down some confines for the rule’s application: other than petroleum revenue tax, it should initially apply only to the “main direct taxes.”

Although “other taxes” could be considered later on, the study adds GAAR should not extend to VAT on the basis that VAT already has its own anti-abuse rules (derived from EU law which could cause a conflict).

The initial tier of this reasoning by the study authors – Mr Aaronson and his advisory committee – is partly why the contractor tax captains do not expect GAAR to extend to employment status.

“For this [area of compliance], there is already legislation in place available to HMRC,” Mr Hesketh said.

The CIOT’s Mr Whiting agreed: “The aim of the Aaronson proposal is firmly at contrived schemes, and to deter those schemes. I cannot see that it would be used to target [those who decide to work through a company]…because there is a myriad of rules, IR35 and MSC in particular, that police that area.”

Similarly, with the single compliance area that Abbey Tax said contractors may happen to get caught under any ensuing GAAR – offshore vehicles, the Revenue is “already attacking”.

For Brookson, it is more likely that GAAR will provide the taxman with “yet another line of potential attack,” where current legislation “does not provide a route to enquiry” (which IR35 does).

To this end, the accountant says the closest the rule would come to an IR35 context is to target a “disguised employer”, or recruitment agency, that lowers their own tax bill by forcing workers into personal service companies.

“There is currently no direct route for HMRC to pursue these rogue employers, who are the actual tax avoiders, rather than the worker who unwittingly breaks the law simply by trying to find work,” Mr Hesketh said.

“Whereas under the GAAR, employers would bear some risk where they have insisted on a particular way of working which is obviously inappropriate for the worker… [and would] allow HMRC to recover the tax and boost Treasury funds.”

End-users and agencies may be interested, then, to note that the GAAR is designed to have two in-built safeguards: the first is for “reasonable tax planning,” the second is for “arrangements without tax intent.” 

Moreover all taxpayers, corporate and individual, are likely to appreciate an additional caveat in the GAAR recommendations, especially if they use affected schemes before, on or even after March 21^st.

“There is a case”, states the study, “for arguing that the GAAR should not apply to arrangements which are entered into (even if they are not completed) by the time when the GAAR itself enters into force.”

Assuming it is Budget day, that date is too soon for chartered accountancy firm Kingston Smith, which says GAAR as a model for HMRC and taxpayers to follow, still appears in its “early stages”.

The firm’s technology partner Paul Spindler is also concerned over the rule’s impact on the big picture. He said: “I would have thought that the last thing the economy needs right now is yet more regulation.”