How do I know if I am looking at one of those tax avoidance schemes?
The basic rate of income tax in the UK is 20%. If you earn more than £50,000 a year, the tax rises to 40% and if you earn more than £150,000 it’s 45%. Also, for every £2 over £100,000 you earn you will lose £1 of your annual tax free allowance. On top of that, employee’s national insurance is payable at 12%.
So, bearing all that in mind, how believable is an advert that says “Take home 90% of your income, 100% compliant”? Especially as the company offering the scheme will take a fee of around 5% of the contract value. To put it in context:
You earn: £75,000 per annum
5% Fee: £3,750 per annum or £312.50 per month
Available for HMRC: £3,750 per annum or 5% of income
That is actually payable on earnings of £75,000 per annum is about £19,000 (depending on your tax code) so you would owe HMRC £15,250.00. Unfortunately, if they come after you for that, they wouldn’t just leave it at that; they would add penalties of up to 200% of the tax owed and then they would add interest. (http://www.hmrc.gov.uk/news/offshore-penalties.pdf).
Most of the tax avoidance scheme providers are not based in the UK and many rely on the tax laws of their home country to support the scheme (predominately the Isle of Man, Jersey and Guernsey). However, UK tax law states that you are liable for UK tax if you reside in the UK, are UK tax resident and you work in the UK. To this end, in May 2013 the Treasury minister, Danny Alexander announced that ‘the Government intends to introduce an income tax and NIC charge levied on the offshore intermediaries of those workers engaged in the UK’.
In the case of one of those particular tax avoidance schemes, contractors are facing repayment of underpaid tax, interest and penalties going back over 10 years because HMRC applied legislation retrospectively. Users of the scheme and the scheme provider have spent the last 6 years doing battle with HMRC but many hundreds of contractors are facing bankruptcy and even homelessness, marriages have broken down and there has even been a suicide.
Here are some examples of adverts for avoidance schemes. Go ahead but ask yourself, do you feel lucky?
“Take Home up to 91% From Contracts. Best Umbrella Company Alternative!”
“Up to 90% after tax. 100% Compliant More tax-efficient than an Umbrella”. “Retain 90% Of Your Earnings After Tax – Safe And Compliant”
“£250+ a day UK contract? Keep 85%. Compliant solutions. Prompt payment.