HMRC Sharpens Tax Avoidance Focus

The announcement in the Budget that the Government will pass legislation introducing a General Anti-Abuse Rule (GAAR) was a formality given the extensive discussion and consultation that preceded it.

The GAAR will attempt to give legal effect to what tax specialists have long called the ‘Ramsay principle’, after a well-known tax case. The basic premise is that where a transaction includes steps that are undertaken for the purpose of tax avoidance rather than some commercial outcome, HMRC will seek to annul any tax saving that results.

Less well publicised was the announcement that HMRC’s IR35 compliance unit has tripled the number of investigations being started by its enquiry teams. These will target ‘one-man band’ service companies that do their work for one client or a very small number of clients. This structure is often used because extracting profits by way of dividends rather than salary can be an efficient way to save on National Insurance Contributions. It is particularly common in the IT and service industries. The IR35 legislation seeks to ‘look behind’ such arrangements and bring them into the PAYE tax regime. When HMRC are able to show that the IR35 legislation is applicable to the circumstances, the financial costs can be very high.

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