Recent comments from the Prime Minister and Deputy Prime Minister have renewed hopes that IR35 may be destined for an earlier dispatch to the knacker’s yard than many contractors had supposed.

There’s a certain amount of ‘reading the runes’ involved here but, while talking to a group of small business entrepreneurs last Thursday, David Cameron mentioned three critically important words: general anti-avoidance powers. This is what he actually said while addressing the issue of tax avoidance:

“I think we need a tougher approach, one of the things we’re going to be looking at this year is whether there should be a more general anti-avoidance power that HMRC can use.”

The significance of this remark lies in the fact that, if he were serious, the implementation of a General Anti-Avoidance Rule (GAAR) – which New Zealand and Canada have already achieved – would render IR35 wholly superfluous. Many pundits consider this to be a vastly more preferable alternative to the UK’s IR35 regulations, not least because GAAR hinges on a set of principles rather than on hard-edged rules.

Contractors working through their own limited companies tend to favour the GAAR approach because it allows fresh case law to be set down around disguised employment rather than, as now, recycling inflexible definitions. Such a move could assist HMRC to avoid making the abundant mistakes they have accumulated in the past over their policing of IR35.

Nick Clegg, speaking on Radio 4’s Today show on the same day, said:

“There should be a general rule that you cannot play the system. We have received a report from an expert, Graham Aaronson, which says an anti-abuse rule is feasible.”

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