There are many responsibilities on your shoulders as a limited company director. One of the most costly and time consuming for many is tax. This is why 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 and many of these are laid out in the guidelines provided by HMRC (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.

But falling victim to the wrong tax avoidance scheme can be detrimental to you and your company. To make sure you’re in the know and well-informed, we have put together a guide to offshore schemes. Read to discover how to spot an offshore tax scheme and what the penalty could be if you’re caught out.

What is a tax avoidance scheme?

A tax avoidance scheme is the practice of depositing money into a separate account for the purpose of avoiding tax which is due on your income. Often, this structure is made in a foreign bank account as an offshore scheme. These schemes are legal in the EU, but there are fears that this may lead to tax evasion. 

How to tell whether your tax scheme is offshore

If you live and work in the UK, you will be required to pay tax unless you fulfil a very specific set of requirements. 

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.

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 is the Serial Tax Avoidance Scheme (STAR)?

In an effort to control the number of tax avoidance schemes, HMRC incorporated a piece of legislation known as the Serial Tax Avoidance Scheme (STAR).

HMRC describe this as legislation forming ‘part of a range of measures to clamp down on tax avoidance, to change the behaviour of those who engage in tax avoidance and to discourage them from using avoidance arrangements in the future’. 

It aims to do this by imposing sanctions and penalties on individuals using tax avoidance schemes to reduce their tax liability which later transpire to be non-allowable.

Who does the Serial Tax Avoidance Scheme apply to?

Although it was intended to target only serial tax avoiders, legislation applies to to all taxpayers who have have only ever used one defeated tax avoidance scheme in the past.

How does the STAR work?

If a company director is suspected of tax avoidance, HMRC will undertake the following:

Warning period

If HMRC has detected that you are using a tax avoidance scheme, they will issue you with a notice within 90 days to let you know that they have issued you with a STAR.

You will be informed that this warning period will last for 5 years, which is split into shorter reporting periods.

Reporting periods

For each reporting period, you will be required to provide an information notice to HMRC. This includes:

  1. Information about DOTAS, VADR OR DASVOIT arrangements that you have used to achieve a tax advantage;
  2. How the arrangements were used to avoid tax/avoid being obligated to do something; and
  3. How much tax you will have avoided as a result

What are the Serial Tax Avoidance Regime sanctions?

If you enter into a new scheme whilst you are in a warning period, HMRC may impose any of the following sanctions:

Charging a penalty

If you have not been given a warning notice before, the penalty will normally be 20% of the counteracted advantage.

If you have received prior notices, the penalty could rise to 40% or as high as 60% if you have received two or more notices before.

Publishing your details as a serial tax avoider

If any of the following is applicable, your details may be published as a serial tax avoider:

  1. You used a new scheme during a warning period and that scheme was defeated
  2. You have been given 2 or more notices

If your details are published, they could include:

  • Your name and address
  • The nature of your business
  • The amount of tax you have tried to avoid and the penalty you have been charged
  • The period in which you used the tax avoidance scheme
  • Any other details which are necessary to identify you by
Stopping you from claiming future tax relief

You can be stopped from using tax reliefs (including the ones likely to affect a contractor: Capital Gains Tax, Corporation Tax, Income Tax, National Insurance, SDLT, VAT) for a period of 3 years, if all the following apply:

  • You used a new scheme during the warning period which was defeated;
  • You have received 2 or more prior warning notices;
  • The new scheme, and at least 2 of the prior schemes that resulted in warning notices, all involved the misuse of direct tax reliefs;
  • The arrangements were counteracted on the basis of a particular avoidance related rule (which is a tax rule set up in order to avoid tax or obtain a tax advantage, or not having a commercial purpose);
  • The misused relied was a loss relief.

What could happen to users of offshore 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 to make sure you’re not using an offshore tax scheme

Some providers will give you a Scheme Reference Number, claiming that this demonstrates that their scheme has been approved by HMRC. However, this 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.

Can I save money and comply with HMRC?

There are plenty of ways in which you can legitimately save tax. 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. 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% of your income, a more realistic assessment of your take home pay using legitimate means would never usually exceed around 75 -80%.

How can Nixon Williams help?

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.

For more information about making the most of tax efficiencies, you can talk to one of our specialist accountants by calling 01253 362062 or email us at newbusiness@nixonwilliams.com.