In general terms if something looks too good to be true then it typically is. In general a lot of thought is put in to tax avoidance schemes to ensure that not only do they give the degree of comfort to the prospective client, but sometimes not much thought is put in to the groups to which they are marketed. A recent tax planning opportunity was presented to me for review in my capacity as the Tax Partner as an ACCA Registered Practice.
The scheme was headed up “Strategic Planning for Limited Company Directors”. My first response was to dismiss it as a Tax Avoidance Scheme and that the client should be wary or at least get the Scheme Number. Subsequently I chose to look at the mathematics of the scheme to see whether our client would benefit assuming the claims are valid giving the scheme architects the benefit of doubt.
I will let the author describe the scheme to you in his own words:
“Thank you for your time earlier. Xxxxxx works in conjunction with Xxxxxx Tax and Asset Planning. Xxxxxx Tax and Asset Planning represent a Mayfair based law firm specialising in tax, who have established and implemented tax and asset management strategies within the UK since 1989 and have administered those strategies on behalf of in excess of 20,000 companies and individuals within that time. As leading service providers within this complex financial arena it was a natural progression for those services to be offered to the high end freelance market sector.
The purpose of this e-mail is to give you all the information that we discussed earlier today in black and white. There is also an attachment looking at the strategy in further detail. It has been constructed in conjunction with the leading Mayfair-based asset protection firm and has been approved by Robert Venables QC. For years now many Directors of Ltd Companies have been advised to pay themselves a small salary, offset their expenses, take dividends out to the high-rate tax band and leave the remaining funds in the company. Whilst this can allow you to retain a high percentage of your company turnover it can be a false economy as whilst your annual tax bills are reduced, the amount of liquid funds available to you are reduced dramatically as well. When the time comes that you would like to extract the funds from the company, you will have to pay tax on those funds, which results in the tax bills being deferred rather than reduced.
We can introduce you to a tax planning strategy that will allow you to run a Ltd Company, keeping all current relationships in place and maintaining full financial control of your business. The strategy will allow you to extract all of your profits in the year you earn them without having to worry about the high-rate tax band. The solution is based on utilising a commercial trust as part of your tax planning strategy. In order to become a beneficiary to the trust you make monthly contributions of £100 as a financier ( £100 is recycled) This means that as one of the financiers to the trust you become a beneficiary and are now eligible to accept discretionary payments from the trustees.
Please read the PDF and Legals for a comprehensive explanation.
Example illustration based on £84,000 or £7,000 per month:
1. You will also receive the 20% VAT (20% of £7,000) so will be paid £8,750 into your Ltd Company.
2. Assuming are on the Flat-rate VAT scheme registered as an IT Consultancy which is 14% you will only have to pay £1,225 (14% of £8,750) leaving £7,525.
3. If you are claiming around £500 in expenses each month for example, you can transfer this amount straight into your personal account, leaving £7,025.
4. The most tax efficient salary to pay yourself is £786 each month so you will just transfer this amount straight into your personal account, leaving £6,239.
5. You would then transfer this full amount to the Trust and after the 19% fees has been deducted you will receive a discretionary payment from the trustees of £5,053.59 in your personal account within 24 hours (usually same day). When we add the salary (£786) and expenses (£500) then overall you will retain: £5,053.59 + £786 + £500 = £6,339.59 £6,339.59 / £7000 = 90.25% As you can see this is the absolute minimum you can pay in Tax. If you did wish to up your salary or take some dividends that is an option but it is still going to work out at a significantly higher return than through the salary dividend split, allowing you access to all of your money in the year you earn it.
Some Key Benefits:
The solution is based on case law and not QC opinion. Known to be known to HMRC (as they have challenged it twice) therefore is covered by the hallmark as not Deemed as a tax avoidance scheme.
Bound by Fiduciary trust law. Indemnified by Lloyds of London.
Been in operation for 24 years.
Funds stay in UK at all times.
I have scheduled a time to call you in a couple of weeks. Good luck with your new contract. As I have no knowledge of the HMRC challenges, have not seen the QC Opinion, and the other parts of the key benefits I have no comment on the scheme, apart from the fact that my Tax Journals are full of schemes that HMRC are now successfully challenging.
The latest being Tower Radio and Aberdeen Asset Management.
Looking solely at the sales email sent to our client.
1. £7,000.00 x 20% = £1,400.00
Gross Invoice Value = £8,400.00 (not £8,750.00 as stated in the email)
2. VAT Flat Rate Liability for an IT Consultancy is 14.5% not 14% VAT due = £1,218.00 (HMRC published Rate)
3. Net Contract Value would be = £7,182.00
4. Annual Contract Value = £79,002.00 (Most individuals work 11 months not 12)
5. Individual generally pay accountants about £1,000 plus VAT = £1,200.00 (Cant reclaim the VAT as VAT FRS, accounts still need to be done)
6. Expenses £500.00 pcm = £5,500.00
7. Directors Remuneration = £9,432.00 (This is Tax Free, but not NI Free)
8. Employers NI = £240.00 (First £7,696 is free of NI, totally ignored) Gross Profit Before Tax = £62,630.00 Corporation Tax = £12,526.00 (Seems to have been overlooked in the sales email?) Net Profit available to distribute = £50,104.00
9. Employee NI = £262.08 The proposal suggests that the £50,104 is then distributed to the Trust. The question has to be why? An individual can earn £41,450.00 before paying tax at the higher rate of 40%.
So the options where the saving are achieved:
A. Transfer £50,104.00 to the trust and then pay the a 19% fee = net of £40,584.24
B. Draw down a dividend of £50,104 on which £5,323.73 will be payable in higher rate tax.
Put another way:
Option A = £79,002.00 – £1,200.00 – £240.00 – £262.08 – £12,526.00 – £9,519.76 = £64,774 or 82% Option B = £79,002.00 – £1,200.00 – £240.00 – £262.08 – £12,526.00 – £5,323.73 = £68,970 or 87%
This scheme is clearly not designed for individuals earning below £150,000 and I am unsure at where the breakeven point is. The scheme is marketed to save Higher Rate Taxation on profits drawn down in the form of dividends by a Company Director, but the savings surely have to outweigh the costs before you even consider the risks associated with schemes that are designed to “Abuse or Exploit the Tax Code” for which recent legislation has been put in place (GAAR).
This article has been written and contributed by by Paul Hughes from I-Paye, one of the All Umbrella Companies Are Equal “Straight Talkers”.