Offshore Tax Avoidance Schemes

What is a tax avoidance scheme?

A tax avoidance scheme is exactly what it sounds like – a structure designed to illegally avoid tax that is legally due on income, in order to maximise the amount of money a contractor takes home.

Legitimate tax planning through a contractor accountant is designed to use guidelines, allowances and tax breaks provided by HMRC, in order to minimise your tax liability. This is the role of any good contractor accountant – to maintain a proper understanding of legislation and make sure you are taking advantage of everything you have a legal right to.

Tax avoidance schemes go a step further. They misuse the UK tax structure in order to gain tax advantages which were never intended by HMRC, often by misrepresenting the source or destination of your income. HMRC are continually challenging these schemes and have taken the position that any misuse of tax legislation, not intended under the law, is illegal. Tax avoidance schemes are being aggressively – and successfully – pursued by HMRC.

How do I know if it’s a tax avoidance scheme?

There are many ways in which a business will seek to gain an unintended and illegal tax advantage for their contractors. We will provide information on some common warnings signs in this guide, but there is a general rule of thumb you can use;

“If it seems too good to be true – it is!”

HMRC will never ‘approve’ a tax avoidance scheme – or a legitimate service, for that matter. If you are provided with a scheme reference number by an organisation, with the claim that it proves they are “HMRC approved”, be wary!

What are the warning signs?

If the scheme you are considering falls into any of the below categories, be very careful about proceeding. HMRC are aggressively pursuing tax avoidance and you could end up having to pay back all savings and more in a few years time.

‘90% Take-Home Pay’. This is commonly advertised by rogue umbrella companies. Umbrellas are employers and all employers are required to pay taxes at the same rate. If they are offering a rate drastically higher than competitors, they are doing something dodgy. Take-home pay through an umbrella company should be 60-65% of the contract rate.

High rates of expenses factored into your pay. Are you really claiming £300+ in expenses each week? And would you be able to prove that to HMRC, if they asked you to? Artificial inflation of expenses is a common way of avoiding tax due on taxable income.

Loans in lieu of salary. Are you really taking a loan? Is there an expectation that you will pay the loan back or is it effectively non-repayable? If it is not repayable, it is just a misclassification of taxable income – ‘creative’ accounting at its worst.

Offshore company structures. If your business is based outside the UK, then UK tax isn’t due, right? Wrong! If you are working in the UK, then UK taxes are payable. Attempting to route money through an offshore scheme is a misuse of overseas taxation legislation, as intended.

What are the risks?

HMRC is actively pursuing tax avoidance schemes and have new powers to reclaim underpaid tax and NICs from contractors operating under them – even years after the scheme has closed.

The tax office has the power to issue an Accelerated Payment Notice (APN), requiring full payment of disputed tax bills within 90 days – these have particularly been used to target users of Employment Benefit Trusts (EBTs), a common avoidance scheme.

Retrospective legislation – the controversial ability to legislate against schemes and pursue users for unpaid taxes in previous years, even if they were permitted at the time – means that the intent of the law is far more important than the letter of the law.

What should I do?

The tax bills issued by HMRC are often far in excess of the tax liability you would have paid, if operating through legitimate means. We always recommend you use a reputable provider, whether they are an Umbrella Company or a contractor accountant administering your own Limited Company. Look out for any “too good to be true” claims and give them a wide berth.

A Limited Company is usually the most tax-efficient way to manage contract income, without misusing UK tax legislation. Our specialist contractor accountants here at Dolan Accountancy would be more than happy to discuss your options and give you a bespoke illustration of your take-home pay, based on your personal circumstances. For more information, give us a call on 01442 795 100 or email jaime.thorpe@dolanaccountancy.com.