HMRC have published Spotlight 53; ‘Disguised remuneration: tax avoidance using capital advances, joint and mutual share ownership agreements’.
The aim: to ward off individuals participating in schemes that avoid Income Tax and NIC this time via capital advances and complex offshore joint (or mutual) share ownership arrangements as disguised remuneration.
The contractor becomes an employee of an “umbrella company” or a connected entity, such as an offshore company and signs a Loan or capital advance agreement. Alongside this they also sign a Joint/mutual share ownership agreement.
Any monies received by the contractor are made as two separate payments, with a nominal salary with little or no tax and NIC’s paid. The second payment is a weekly or monthly loans detailed as a ‘capital advance’.
The employer company then undertakes various share transactions involving an offshore joint/mutual share ownership trust. These happen to not provide any financial gain to the employee, but the shares may provide a dividend for the employee.
In Spotlight 53, HMRC says that this is an attempt to ‘dress up’ employment income to purposely avoid PAYE, Income Tax and NIC.
Involvement in one of these types of scheme means the contractor will be liable for taxes and NIC’s on the value of the loans received, interest and penalties. For transactions post 14th September 2016, a General Anti-Abuse Rule (GAAR) penalty of 60% but only where if GAAR applies.
HMRC’s advice to those people is to settle now to avoid a future investigation and increased liabilities.
Spotting these tax avoidance schemes…
Some contractor loan schemes involve giving you some or all of your payment in the form of a loan that you’re not expected to pay back. It’s diverted through a chain of companies, trusts or partnerships and you’ll be told this is to save you tax. The scheme promoter claims there’s very little risk to your investment.
What if HMRC has given it a Scheme Reference Number?
This is where HMRC has identified the arrangement as a potential tax avoidance and are investigating it. Any contractor working via one of these schemes will be been given a Scheme Reference Number (SRN) by the promoter and it must be included it on your tax return. Having an SRN does not mean that HMRC has ‘approved’ the scheme.