We’ve all heard the old adage ‘if it’s too good to be true, then it probably is.’ A minority of contractors are still getting caught up in schemes that are offering 85-95% take home pay. These may not be all that they seem. HMRC is continuing to focus their attention on reducing the number of tax avoiders, and are cracking down on these schemes offering unrealistic and inflated take home pay. Do you really want to be caught out with a massive un-paid tax bill and a possible court conviction?
HMRC has updated the official guidance on tax avoidance schemes, spanning across five chapters warning people about tax avoidance. This guidance raises awareness of these schemes and the implications that arise if you avoid paying tax. You can find the full guide from HMRC here.
Tax avoidance schemes are generally promoted very cleverly. They advertise their ability to ensure you ‘save tax’ and are sold to contractors based on ‘concealment, pretence, non-disclosure or misrepresentation of the true facts’. Promotors of such schemes will inform you that the payment is non-taxable due to its arrangement and therefore not counted as taxable income. However, when successfully challenged, HMRC can tax disguised remuneration paid to contractors and freelancers through these schemes, just like normal income.
Look out for these warning signs highlighted by HMRC:
- It sounds too good to be true and cannot have been intended when Parliament made the relevant tax law. For example, some schemes promise to get rid of your tax liability for little or no real cost, and without you having to do much more than pay the promoter and sign some papers
- The tax benefits or returns are out of proportion to any real economic activity, expense or investment risk
- The scheme involves arrangements which seem very complex given what you want to do.
- The scheme involves artificial or contrived arrangements
- The scheme involves money going around in a circle back to where it started
- The scheme promoter either provides any funding needed to make the scheme work or arranges for it to be made available by another party
- Offshore companies or trusts are involved for no sound commercial reason.
- A tax haven or banking secrecy country is involved
- The scheme contains exit arrangements designed to side-step tax consequences.
- There are secrecy or confidentiality agreements
- Upfront fees are payable or the arrangement is on a no win/no fee basis
- The scheme has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime
Don’t fall into the temptation of rich rewards and promises of no risk guarantees. Not only are you breaking the law by evading taxes, you will find yourself having to pay back the disputed tax, plus interest. You will find yourself under in-depth, intense scrutiny from HMRC, who have a team of highly skilled investigators. You may find yourself being dragged through substantive investigations and paying substantial penalties. On many occasions, contractors operating through these schemes are left with far more to pay out than they saved when trying to evade taxes. HMRC win 80% of cases that are pushed to litigation.
There are ways to plan tax efficiently, such as saving in a tax-free ISA, paying into a pension scheme or making donations to charity through Gift Aid. There is a big difference between using tax reliefs and allowances in the way in which they are intended to be used, and trying to bend the rules to avoid tax. HMRC does not approve any of these schemes and contractors using these schemes should seek advice as soon as possible with regards to their tax affairs.
If you want to ensure that you are paying the correct Income Tax and National Insurance Contributions, then seek guidance from a compliant, UK based umbrella company or specialist contractor accountancy firms. Be confident that the provider you are using adheres to all HMRC legislation and operates compliantly. If you would like further information regarding Cloud9 Umbrella or K&B Accountancy Group, please give us a call on 020 7078 0212 / 020 7078 0211.