Tax Avoidance: The methods and the risks.

Tax avoidance, according to recent media reports, is now of greater concern to the general public than bankers bonuses which may explain why the Government, through HMRC, have been targeting schemes that they believe have been created to enable people to avoid tax. Unfortunately, such schemes seem to be very popular in the contractor market; you can see adverts for 80%, 85% and even 93% take home pay all over the internet, what you don’t see is how they work and what the risks are.

The following are all examples of avoidance schemes, the promised take home pay, how they say they work and why they won’t:

Take home guaranteed – 85% “Focused Managed Service Trust

The structure allows the individual to determine, in an entirely commercial manner, when he or she will become entitled to income [and become obliged to pay tax on it]. The individual may in practice defer entitlement to income – possibly until they have ceased to be a UK resident or until they have passed away.

“ So, basically what’s being said here is that in order to sign up to the scheme you would need to have a ‘commercial’ reason to defer the income that you had earned through working on an assignment, every week/month.

“In the meantime the individual can draw on a credit facility, secured by a charge over the rights to income that has not yet become payable. Senior tax counsel has advised that the use of this credit facility does not trigger any tax liability”

This translates as ‘the individual can ‘borrow’ an amount equal to their earnings from their assignment (less the fee charged by the scheme provider). In effect what happens is that a contractor would give their money to one provider and have it loaned back to them by another. HMRC use various indicators which are intended to make the tax payer wary of particular schemes which, in their opinion, will be likely to be considered tax avoidance.

The scheme described above triggers all of the following:
· It sounds too good to be true (85% take home when basic rate of tax is 20%)
· It seems very complex given what you want to do
· Taxation of income is delayed
· It involves money going in a circle and ending up back where it started
· The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.

The company offering this scheme are based in the Isle of Man and therefore, in April 2014, any agency engaging with them will be liable for the contractors’ PAYE deductions as the contract between the contractor and the scheme provider will be rendered null and void by recent changes to legislation.

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