I've just posted a blog on why we need a real general anti-avoidance principle in UK tax law. There's a PDF of it here.
This is something I have argued for for some time - longer than most in this country. And I am more convinced than ever that we need one now. The latest reports on thousands of people in what are really employments getting round tax law by being paid through companies - when this is obviously a ruse to save them and their employers tax and national insurance - proves how widespread this need is. And I very strongly contend that it's neither anti-competitive, nor a source of uncertainty in the UK tax system to say this.
People in employment should be taxed as if they're in employment under UK tax law, or as H M Revenue & Customs say:
If these requirements are not met it creates unfair competition between those businesses that meet their responsibilities and those that do not. It also creates unfairness where, for instance, two workers engaged on the same project and performing the same tasks for separate businesses are not paying the same tax and NICs due to the incorrect classification of one of them.
So it's fundamental to tax justice that this happen. And yet despite there being law to try to enforce this as is very obvious this type of abuse goes on. A general anti-avoidance principle of the type I propose would stop this because if there was, under the arrangement I suggest:
1) a series of transactions; which are
2) pre-ordained; and
3) into which there are inserted steps that have no commercial purpose apart from tax avoidance,
then the artificial step(s) would be ignored. In the case of these false consultancy arrangements that artificial step is inserting a company into what was really an employment relationship. The risk in such a case would also, appropriately, be on the employer who had not applied PAYE who would then have to make good the shortfall to HMRC, maybe taking into account what the recipient company of the employee had paid, if any.
But let's be clear, this general anti-avoidance principle does not stop in this case:
1) people genuinely self employed running a business through a company;
2) people genuinely self employed running companies paying themselves by dividend, which remains a wholly legal activity albeit one that has attracted government attention in the past.
For both of these issues, and the sensitive issue of paying spouses who (in my experience) frequently do contribute to the management of self employed businesses primarily run by their partners I have offered a much broader solution, which would bring small business tax into the twenty first century, here.
But I stress, those issues are largely unrelated to the abuse of companies to avoid PAYE obligations (although curiously many on the political right seem quite unable to differentiate them). That is why different solutions are needed for each of them.
But of the two it is apparent that the abuse of employment law is the more important now and if ever there was a reason why the UK needs a general anti-avoidance principle and not the extraordinarily limited general anti-avoidance rule Graham Aaranson has recommended, then this is it.
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The pre ordained transactions into which steps are inserted is a carbon restatement of the Ramsay principle that is enshrined in case law and, as such, would make no difference to the law as it currently stands. If HMRC wanted to use the Ramsay principle to attack these intermediaries they could do so, right now, today. The fact they aren’t suggest this new law would be impotent.
Wrong
Read the PDF – please
Hoffman gutted Ramsey
So we have to give it statutory backing
Then it can work
And statute is always superior to precedent
That’s why we need it
I am not sure that your GAAP when applied to self employed people using a company would not serve as a huge problem in starting up.
If you were established as a consultant with five customers then when you go to a new firm they can be reassured that this is not a situation where PAYE is being hidden behind a company front.
But what if you are a startup with no clients or only one? The customer would have to assume that you would be only dealing with them and therefore use PAYE to cover themselves from the liability you describe. This would make it very difficult and expensive to start a business because the first customers would have to assume you would work only for them, meaning higher taxes for startups.
Also what happens when you have five customers and then fall to on, does PAYE kick in?
This is just not an issue
Just go and read the HMRC test for self employment and you will see that there are many other factors
You’re creating a straw man – as you people always do
Hey don’t get me wrong, you can go after the big multi nationals all you like, in their case I am all behind you on the GAAP front.
But I differ on small business and company activities when the beneficial owner is resident and domiciled in the UK. This is the kind of activity we need and there should be a wide amount of slack in order to encourage this activity as much as possible.
Keep the GAAP, go for the multi nationals, just don’t hit the small companies because they are an easy target!
Oh come on – I’m targeting people who break the law
And they undermine small business. They don’t help it
If you really believe in small business then you believe in giving it a level playing field