If you come across a ‘too good to be true’ scheme, check out the website of the scheme operator. A single page that promises an 80-90% take home pay claim without an explanation of how that figure will be achieved? Best to look elsewhere we’d say!
Basic Take Home Pay Calculation
The basic rate of income tax is 20%! All umbrella companies will retain a margin from the contract value! So it doesn’t take a mathematical genius to work out that the take home figures quoted really don’t stack up.
You will often find, in very tiny letters, a disclaimer on the site along the lines of “ solutions does not give investment, legal or tax advice of any nature. It is possible that the structure may be challenged by HMRC in the future or retrospective legislation may be introduced”. However, the reason for a disclaimer of this type is that the scheme provider hopes it will protect them from litigation. That is when the contractors who used the scheme are targeted by HMRC and forced to pay back the tax they owe, plus interest, plus penalties. You only have to have a read through here to realise quite how many contractors have been caught out by the schemes and how they are now suffering at the hands of HMRC.
You will notice in that disclaimer that the scheme provider refers to ‘retrospective legislation’; this is as a result of section 58 of the Finance Act 2008. The Treasury decided it was not enough to shut down an offshore tax avoidance scheme! They decided to apply the legislation as if it had always been in place. The effect of this was that contractors who had used the scheme were expected to pay back underpaid tax, interest and penalties for a period of up to 7 years. The contractors affected have been campaigning for several years to have the retrospective element of the legislation overturned. But, in the meantime, many have lost their homes, marriages have broken down and there have even been suicides.
Tax Avoidance Schemes
Many of you may be aware of offshore tax avoidance schemes and ask where the umbrella company is registered. This should be part of your due diligence process. However, there are some ‘on-shore’ schemes which are likely to cause just as many problems. There are a number of schemes that claim to employ contractors. They deduct the correct amounts of tax and NI but still make up to 90% take home pay claims. Again, simple maths prove that this cannot be possible… Any contractor earning over £40,000 per year (contract rate of approximately £200 per day) will pay 40% tax on everything over that amount. Many of you will have placed contractors who earn in excess of £400 per day; if you work out how much tax is payable you will see that a 90% take home just cannot legitimately happen.
Despite the many claims by tax avoidance scheme providers, the fact is that HMRC don’t like them. Meaning they have spent the last few years doing whatever it can to close them down. Many of the companies folded leaving the treasury out of pocket. To get round this problem HMRC introduced debt transfer! Basically if you recommend a scheme to a contractor and HMRC, as a result, don’t get their fair share of tax they could well come knocking on your door for payment.