As pressure mounts on the government to find an IR35 successor, there are increasing calls to introduce a new General Anti-Avoidance Rule (GAAR) in next April’s Budget. The clarity that might come from such a rule could well be a benefit to contractors; and it could also be a less potentially damaging IR35 successor than other proposals being mooted.
As Nizar Manek of the London School of Economics highlights in a blog published by Reuters yesterday, new legislation based on principles rather than prescriptive rules would allow the courts to develop fresh case law that could provide greater certainty for contractors.
“If properly crafted, with an adequate clearance mechanism and appeals procedure, the GAAR could give the courts clear constitutional authority to strike down unacceptable tax avoidance schemes,” says Manek, “conferring upon judges a necessary interpretative power, beyond mere formalism in statutory interpretation.”
Warning shot in June’s emergency Budget
The introduction of a GAAR should come as no surprise, as the government announced that it would “examine whether….there is a case for developing a General Anti-Avoidance Rule” in paragraph 1.126 of June’s emergency budget document.
And, according to Manek, many other countries that operate a system of common law similar to the UK, such as Canada, New Zealand and Australia, have introduced such ‘super laws’ to tackle tax avoidance.
The resulting case law has provided guidance for the courts in implementing the rules, as Manek explains: “Recent case law of the Canadian Supreme Court has, for instance, developed significant interpretative guidelines for important elements of their GAAR.”
If properly crafted, with an adequate clearance mechanism and appeals procedure, the GAAR could give the courts clear constitutional authority to strike down unacceptable tax avoidance schemes
Nizar Manek, London School of Economics
Will a GAAR benefit contractors?
Until the Government publishes its findings on whether a GAAR should be created, which could potentially be in time for the April 2011 budget, the full impact on contractors’ tax affairs is unknown.
The major area of tax uncertainty currently faced by contractors is what will be the successor to IR35. This, of course, assumes that the future review of taxation by the new Office of Tax Simplification will recommend IR35’s repeal. But any measures that remove this doubt over tax status should be welcomed. So, GAAR could potentially clarify the status of offshore tax solutions and similar schemes, allowing contractors using such options to plan for any changes in their tax status.
GAAR: might it come in before IR35 is changed?
As ContractorCalculator’s CEO, Dave Chaplin, points out, no-one is yet in a position to predict exactly what an IR35 successor might look like. “However,” he says, “IR35 is being reviewed by the Office of Tax Simplification as part of a wider review of small business taxation and OTS tax director John Whiting has already warned contractors that a repeal of IR35 is not imminent. That means it is perfectly possible a GAAR may become law before IR35 is changed.”
Dave Chaplin is a former IT contractor in the City of London, and is founder and CEO of ContractorCalculator, and author of the Contractors' Handbook.
Started in 1999, ContractorCalculator (this site) is the leading independent website for the UK contracting industry – most of whom are highly skilled knowledge workers.
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Manek says: “Old tax certainties are no more. The GAAR has long been waiting in the wings. Fairness must precede certainty: certainty is not necessarily a prerequisite to fairness. A change in the rules of the game is long overdue.” Chaplin agrees: “The one thing nobody has any doubt over is that IR35 is unfair; if a GAAR brought fairness back into contractor taxation, that would be particularly welcome.”
Published: Tuesday, August 17, 2010
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