Offshore Tax Avoidance Schemes
Many contractors decide to take advantage of the tax planning opportunities available to them to save money and reduce their tax bills, there are plenty of legitimate ways to do this which can provide savings opportunities. Many of these are laid out in the guidelines provided by HM Revenue and Customs, and these are considered acceptable means of reducing your tax bill so long as you meet any criteria specified. In this way, certain elements of your expenditure can be written off against tax if your business and circumstances mean that you qualify.
When considering whether an investment or tax saving scheme looks legitimate or not, if it looks too good to be true, it probably is should be a primary consideration. Many of these schemes are illegal, and with the taxman paying more and more attention to their use and abuse, more people than ever before are being caught and having to pay any tax owed as well as penalties which can be sizeable.
Is it offshore?
If you live and work in the UK, then unless your business fits some very specific criteria, you will need to pay tax in the UK. Any investment scheme which requires money to be moved out of the country and claims that this means that it will not attract tax should be viewed with suspicion.
Some of the most common schemes which use this model include issuing various forms of loans rather than an actual salary, sometimes these loans are made against foreign currencies which devalue over time and can therefore appear to be worth less than the original value of the contract.
Other schemes rely on the use of legitimate schemes which the investor is not actually entitled to take advantage of, such as the Section 615 pension scheme which is designed to provide benefits to those who hold pensions with companies which carry out their business outside the UK.
The Employee Benefit Trust is another system whereby contractors were taking minimal wages and accepting the rest of the contract value in the form of a loan which was not liable for tax. The theory was that the loan would then be written off leaving the contractor with a tax-free sum in hand, whereas any legitimate use of such a trust would mean that the recipient would be liable for the full rate of tax on any loan payments as soon as the loan was written off.
What could happen to users of these schemes?
With increasing HMRC interest in the schemes that people are using to avoid paying the tax they owe, the chances of any given scheme being investigated and closed down is relatively high. Those who have been using such schemes will often be expected to pay any tax owed as soon as the investigation commences, as well as being fined.
Schemes found to be purely designed to avoid tax are usually shut down by HMRC, and recent court cases have made provision for the department to issue payment notices which will allow them to collect outstanding tax, interest and fines whilst still investigating any such schemes.
How can I make sure I am not using one of these schemes?
Some scheme providers will give you a Scheme Reference Number, claiming that this demonstrates that their scheme has been approved by HMRC. This is not the case – the department guidelines are quite specific about the fact that they do not issue blanket approval for any schemes as so much can depend on how they are used, who by and under what circumstances.
Any provider which claims to be able to ensure that you take home 95% of your contract value or similar will usually be abusing the system, leaving you exposed to the risk that HMRC will pursue you for the difference between what you have paid and what you should have paid. Ultimately, your tax affairs are your responsibility, and you will be expected to assess the merits of any investment scheme or similar for any likelihood of it being disallowed by HMRC.
Ignorance of abuse of the tax system will not be considered an excuse for avoiding tax in this manner, unless in exceptional circumstances, and courts have made it quite clear that individuals will be held accountable for any unpaid tax that they are found to owe.
How can I save tax and comply with HMRC?
There are ways to make the most of effective tax planning and save money, and these will allow you save more realistic sums than avoidance schemes claim to offer. One of the most popular and best known is that trading through a limited company allows you to take advantage of some tax savings, such as drawing down dividends in addition to taking a salary from your business. Limited companies are also entitled to claim a wider range of expenses than individuals operating as sole traders, and there is ample information about how to do this on HMRC’s website, which is one way of determining the legitimacy of any deductions.
Whilst avoidance schemes will often claim that they will allow you to keep around 90 per cent of your income, a more realistic assessment of your take home pay using legitimate means would never exceed around 75 or 80 per cent. For the best way to take advantage of legitimate savings, a specialist accountant will be able to offer you advice, support and information about how you can work more tax efficiently. Choosing a firm who are experienced in representing contractors is the best way to make sure that you are getting sound advice which will help you to make decisions which are in your best interests and that of your business.
How can Nixon Williams help?
Because we specialise in representing contractors, locums and other independent professionals, we are uniquely placed to provide advice and information which will help you to save money without exposing you to any risks. We only recommend schemes which are completely above board, and we will explain the ins and outs of anything that we suggest to ensure that you have complete confidence in the way your finances are handled. You will be able to speak to your own dedicated accountant at any time, so you will always be speaking to someone who knows about the details of your case rather than talking in generalisations. For more details on how we could help you, call us today on 01253 362062 or email us at firstname.lastname@example.org.
You may also find the following pages useful:
- Guide to expenses for contractors
- Limited company taxes
- Choosing an accountant
- Contractor's guide to dividends
- Contractor Tax