There have been some interesting developments of late which shed some light on what the future holds for IR35 – the legislation designed to close the loophole which enabled people to work as independent contractors when, actually, in spirit, being more akin to an employee.
Ever since Chancellor George Osbourne announced a review of IR35 in the Emergency Budget, many in the contracting community had their hopes raised for swift action.
However…
A recent announcement from Treasury Minister David Gauke, seems to hint that we won’t be seeing the end of IR35 for a little while – at least until 2012. His announcement detailed how the treasury planned to raise over £2billion in tax over the next five years; and this is the arsenal of weaponry he will turn upon those pesky tax avoiders:
* Bang! With immediate effect, companies will no longer be able to use intra-group loans or derivatives to lower their tax bill.
* Pow! At next year’s Budget, measures will be taken to clamp down on disguised employment. The result being less tax-paying responsibilities.
* Blam! The Government will tackle the practice of investment companies retrospectively changing the currency used in their accounts to lower tax – at the next Budget.
* Ka-boom! The Government will seek to stop businesses from splitting the supply of services to avoid VAT. Once again, at the next Budget. Osbourne red box might need a fork lift; or the broad shoulders of Anne Widdecombe.
Crucially, in regards to IR35, the Treasury Minister also revealed that research would be undertaken into the viability of establishing a GAAR (a General Anti-Avoidance Rule) which, for many industry commentators, is just as horrible as it sounds. A GAAR is effectively a ‘super law’ to combat tax avoidance, whether it’s achieved via offshore accounting processes or through working as a bogus independent contractor, purely to take advantage of the tax savings. They can potentially offer a more interpretive element to HMRC’s adjudications on matters of disguised employment. Unlike IR35, a GAAR is based on principles rather than prescriptive rules, and such legislation would enable new case law to be developed afresh.
Industry website Accountancy Age reported on the backlash from tax professionals. Andrew Jupp, head of tax at Haysmacintyre, referred to the difficulties a GAAR could pose, particularly for small businesses: “It is unnecessary and unwelcome, and will introduce yet more uncertainty into the tax system. Whilst the largest British companies might be able to cope with a GAAR, I cannot see how the smaller businesses, which are the lifeblood of the UK economy, will manage. These businesses constantly tell us that they want less red tape, not more.”
>So, could the study into the viability of a General Anti-Avoidance Rule signal the death knell for IR35? Who knows. But here’s the bad news: the study won’t be completed until October 31 2011, meaning that IR35 is likely be with us at least until 2012.
