In the Autumn Statement, Chancellor George Osborne announced a major package of measures to cut tax avoidance, evasion and tax planning and together, these changes are expected to increase government receipts of £9bn over the next five years.
These new measures will focus on working via an agency, avoidance schemes, charity schemes and partnerships.
The chancellor has announced changes to prevent “employment intermediaries being used to avoid employment taxes and obligations by disguising employment as self employment”. These changes are focused on agencies. If you work through an agency you are treated as self-employed if you meet certain tests. One of these specific tests is the right to send someone else to do the job instead of you, which is known as the right of substitution.
If there is a right of substitution, the company you work for does not have to pay employer NI, saving 13.8% on all wages over a low threshold. Some agencies have been using contracts which include a clause giving the individual a rights of substitution, even when there is, in reality, no such right.
These new rules and changes which target the use of such contrived contracts are expected to net around £500m a year.
HMRC will challenge any marketed avoidance scheme which it believes to be ineffective, through the courts. Usually one or two cases are selected as test cases and take several years to go through the courts. The rest, which are called “followers” by HMRC, sit and wait to see what happens. During this time, followers normally retain the benefit of the tax saving and HMRC have to recover the money later if they win in the courts.
Two changes are expected with the new rules. First of all, if the scheme is defeated in the courts, at any stage, followers will be asked to concede their case. If they do not, because they hope the test case will succeed on appeal, they will be charged a penalty if the test case is eventually lost on the same point of law.
The second, once HMRC have won in court, the followers who do not concede will have to pay over the tax which has been avoided, even though the test case itself appeals to a higher court.
The government are also looking at tightening these rules further so that to prevent those using tax avoidance arrangements gaining a cash flow advantage while it is under challenge.
New rules will also apply to charities which will prevent a charity from being entitled to claim charity tax reliefs, such as Gift Aid, if tax avoidance is one of the main purposes of establishing the charity.
The definition of a charity for tax purposes will also be amended to exclude such charities. These changes are likely to be a response to arrangements such as those set up by the “Cup Trust” in which £46m of Gift Aid was claimed by the trust, but the charity only received benefits of £155,000.
New legislation is expected to clamp down on schemes that, in recent years have seen a number of planning arrangements under which a company becomes a member of a partnership.
Where the arrangements reduce tax rates for the other partners, the rules take effect from 5 December 2013 and in other cases they will take effect from 6 April 2014.
This Autumn Statement underlines the overall message from previous Budgets, that the government wants to narrow the loopholes and tighten the net on tax avoidance.