For a long time now there’s been much talk of the drawbacks and benefits of IR35. Well, mainly the drawbacks. But what of the measures that could potentially replace the complex and largely ineffective legislation?
One option which has been spoken about recently, involves the creation of a new General Anti-Avoidance Rule known by its acronym GAAR.
Unlike IR35, a GAAR is based on principles rather than prescriptive rules, and such legislation would enable new case law to be developed afresh. The idea of using a GAAR was first mooted in June’s Emergency Budget which stated that they would “examine whether….there is a case for developing a General Anti-Avoidance Rule.”
Such legislation would give HMRC more powers to make judgements on issues of tax avoidance enabling closer scrutiny of income tax, corporation tax, capital gains tax and inheritance tax.
In the case of independent contractors who are employees in anything but name, this means that HMRC can more flexible in concluding whether or not they should be subject to the tax liabilities of normal PAYE employees. In a sense, a GAAR would enable them to redraw the lines case by case.
Back in 1997 the Labour government proposed the establishment of a GAAR, but after being lobbied by the accountancy sector they dropped the idea amid concerns that it would be unworkable.
Canada, New Zealand and Australia have introduced similar laws, and in Canada they have developed an interpretive element to the legislation.
A General Anti-Avoidance Rule would allow the courts to develop new case law which could redraw the lines on the issue of “disguised employees” who work as contractors. As a result, there could be much more clarity than currently exists with IR35.
A more common-sense interpretive approach will mean that those who abide by the spirit of the law will have no need to worry. It’s only those who are cynically trying to avoid paying their full tax liabilities who should be concerned.
A GAAR is potentially less damaging than the other alternatives to IR35. Replacing IR35 will be a hard task – a tax system that’s too simple and static will be open to abuse from tax evaders.
A GAAR may help clarify the status of offshore accounting schemes.
If it isn’t operated properly without the required checks and balances, it could give HMRC too much power leaving contractors swimming in a sea of uncertainty decorated with huge whirlpools ready to drag you down to the seabed with fellow unsuspecting victims of anti-avoidance measures.
There are doubts that a GAAR would fail to place a significant burden on HMRC to justify its use. This would leave contractors at the mercy of their whim.
A GAAR would tackle a wide range of functions such as tax planning, signing a trust deed, moving money into shares and transferring assets. As one commentator said: “It’s like using a sledgehammer to crack a nut.”
There are simply too many potential hazards if it isn’t operated properly.
General Anti-Avoidance Rules present both an opportunity and a threat. If worked improperly then they could become a nightmare for contractors, but if done so sensibly then it may just provide a common sense interpretive approach which will offer greater clarity surrounding the issue of ‘disguised employment.’
Image by Learning Futures Festival 2010 ~ cc
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