Confusion over the General Anti-Avoidance Rule has left many contractors concerned about their tax affairs.

Monday 8 April 2013

When the government first began looking into a General Anti-Avoidance Rule (GAAR) as a way of countering tax avoidance in 2010, very few suspected what a minefield it might become. By the time Graham Aaronson QC published his report the following year and the government accepted his recommendation that GAAR be implemented in the UK, confusion was already emerging.

GAAR is set to come into force at the same time as the Finance Bill 2013. Though many tax professionals had been working under the assumption that this meant it would come into play at the start of the new tax year (April 6th), the rule will actually not take effect until the bill receives Royal Assent in July. But what does it mean for contractors?

According to HMRC, GAAR is designed to target wholly “artificial and abusive” avoidance schemes by which companies or individuals protect some or all of their assets from tax liability.

For many contractors, fears have persisted that GAAR could be used as a strategy to target their employment status if IR35 legislation failed in its attempt to target disguised employment.

After further guidance was issued on IR35 last week, it became clear that limited company contractors who have no choice but to become an ‘office-holder’ in order to provide the service they are paid for are likely to have to become direct employees of their client if they wish to avoid being subject to IR35.

Similar fears have been voiced about GAAR - that a broad-brush approach could easily mistake the self-employed contractor’s way of working for deliberate tax avoidance.

However, tax experts including Brookson managing director Martin Hesketh did agree last year that there was very little cause for concern for contractors in particular. In a panel discussion for Contractor UK, the experts pointed out that the rule has been developed with much bigger offenders in mind.

The Treasury’s own study on GAAR came to the conclusion that the rule should initially apply to the “main taxes”, with the potential for others to be added later. However, VAT could not be one of those taxes because of the potential for conflict with an existing piece of EU law, while IR35, MSC and other existing laws already covered some of the issues which directly related to employment status. As a result, GAAR could not be targeted at self-employed professionals looking for freelance work.

However, as the Finance Bill comes ever closer, analysts are still far from clear on the application of the rule, claiming that the wording can be ambiguous.

Last week, the House of Lords issued a report criticising the confusing nature of the rule and its guidance. Chair of the Lords’ Finance Bill committee Lord MacGregor insisted that the government should explain to the public that GAAR’s narrow focus will prevent it from forcing huge tax bills out of companies such as Starbucks and Amazon.

Jane Lee, a partner with Pannone, told The Telegraph that the phrasing of the bill allowed it greater scope than the original report had ever suggested. Moreover, the fact that HMRC’s guidance released so far is not actually legally binding leaves uncertainty as to exactly what tax arrangements will and will not be considered acceptable.

GAAR may not directly affect contractors on paper, but until all of the details are clarified for the public, concerns over employment status are unlikely to fade completely.

By Victoria McDonnell

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