Skip to content

Will HMRC use GAAR to reap an unpleasant harvest in the IR35 arena?

Taxpayers make choices about their business conduct based on the prevailing economic circumstances and armed with a business plan. The tax consequences follow from that conduct.

When referring to HMRC’S GAAR GUIDANCE and meaning of “abusive” (the double reasonableness test), there are understandably growing concerns in the IR35 arena.

GAAR is not a new concept – take for instance the version operated in New Zealand, that reached out in the case of CIR v Penny & Hooper whereby it was determined that an un-commercially low salary was tax avoidance! Here in the UK, is HMRC planning to reap an unpleasant harvest for those operating personal service companies - even more unacceptable IR35 uncertainty?

A personal service company structure is not necessarily aggressive tax planning and I would argue that, if demonstrably outside of IR35, then simply incorporating a business and paying what appears to be an un-commercial low salary is not tax avoidance.

However, where tax arrangements contain contrived or abnormal steps, the draft GAAR provisions suggest that the tax arrangements are unreasonable. 

There are sound and legitimate reasons for using entities such as limited liability companies in many business situations. Where a personal service company relies mainly on an individual's personal skills to generate income, that contribution to the risk of being in business should be properly rewarded - either through a salary and/or other forms of taxable distributions such as dividends. This is surely an accepted position for being in business, outside the safe haven of employment.

This is also, in my opinion, online with HMRC’s IR35 objective to deem PAYE and NICs, but only if there were employment-type arrangements by removing the intermediary between the worker and end client.

Just because there is use of alternative business structures should not, on its own, amount to a tax avoidance arrangement. Further, there may also be good non-tax reasons as to why a business owner pays himself or herself a low salary than would otherwise be the case – a new business uncertainty about future trading is one example.

I believe HMRC should focus on the most serious and artificially contrived tax avoidance cases, and recognise that many ordinary small businesses reasonably make use of different entities to carry on their business.

However, there are perhaps those who might enter into aggressive tax strategies not only to seek a tax advantage but also benefit from welfare benefits by structuring their remuneration at a level that will allow them access (or greater access) to those benefits that rely on income calculated for tax purposes such as Tax Credits or other income tested benefits.

In deciding whether tax arrangements are abusive, the GAAR proposals require “all the circumstances” to be taken into account. That is why, each personal service company arrangements need a review to particularise the circumstances of genuinely being in a personal service company business to extinguish the confusion about IR35 and uncertainty of the draft GAAR provisions.

For advice on "Te wahi mo te take hangarau" (Technical tax area) please contact me.