The Cost of Tax Planning

Is the cost of tax planning really worth it? 3 years of taking home 85% of your earnings. 5 years of investigation by HMRC with the associated stress and worry. Then a tax bill for £150,000 – is it really an option?

So let’s look at a potential scenario… You are a contractor, working in London, living in Brentwood. Never been out of the UK other than for the odd fortnight in Spain? So why would you believe someone who told you that you could pay virtually no tax by using an ‘offshore’ scheme? Sure, we have all seen the rich and famous swanning about in their yachts in Monaco or the Cayman Islands happily avoiding tax. But, let’s face it, you don’t have millions in the bank and you live and work in the UK.

What is that you are being tempted by? The promise of 85% take home pay? Can’t say that I blame you, but I wonder if you would be prepared to take the risk if it was 85% take home in years 1 and 2 but only 30% in years 3 and 4?

Why do I say that your take home would go from 85% to 30%? Well, it’s due to a little thing called tax avoidance. More specifically, the Disguised Remuneration Legislation introduced into the Finance Bill in 2011. OK, before you doze off – this made schemes that use benefit trusts illegal i.e. schemes that promise you 85% take home pay by, essentially, loaning you your own money – sound familiar?

Employment Benefit Trusts

The usual set ups are that you will work through an Employee Benefit Trust or a Contractor Benefit Trust. Or a Self-Employed Benefit Trust or an Employer Financed Retirement Benefit Trust. They will all have been set up with no purpose other than to avoid UK tax liabilities and they are all being targeted by HMRC for that very reason. The scheme provider will be paid by the client or agency that you work for. You will be paid for that work you have done via a loan produced from the Trust which is then not subject to tax until it’s paid back and, of course, the scheme provider won’t ask for it back so you don’t pay tax – that’s the theory anyway.

HMRC Investigations

The problem comes when HMRC investigate the scheme and declare it to be tax avoidance. They then ask you to pay back all your underpaid taxes i.e. income tax, employee’s NI and, on occasion, employer’s NI. It doesn’t stop there though; they will also charge interest of up to 10% over base rate and then penalties of up to 100% of tax owed.

What does this mean in real terms? What is the actual cost of tax planning?

A contractor who used an offshore tax avoidance scheme based in the Isle of Man has been subjected to investigation by HMRC, along with 2000 other contractors, for over 5 years. He was in the scheme for just 3 years and is now facing a tax bill of £100,000 + £50,000 in interest.

So the moral of the story is: if you decide that tax avoidance schemes are a good idea make sure you put at least 30% of your earnings aside for when HMRC come calling… because come calling they will.