How they say the scheme’s work and why they probably won’t!
If you look on the internet at ‘umbrella company take home pay’, you will be amazed at the number of companies that promise 80% – 90% take home pay. If you click on their websites, you will find that they don’t tell you much other than that though; they don’t give much away because potentially what they are marketing is a scheme to avoid paying tax. AUCAE look at why Tax Avoidance Scheme’s don’t work!
They all claim that their schemes are ‘compliant’, so let’s see…
Tax Avoidance Scheme’s don’t work
Most schemes operate using ‘loans’. These are set up alongside a Trust so, basically, you work on your contract. Your earnings are paid to the umbrella company. They then lend your money back to you and you won’t pay tax on it. Be honest, does that sound like something that HMRC would like, let alone approve?
The marketing material produced by the scheme operators is worded in such a way, however, that the whole proposal seems perfectly reasonable. e.g. “A Focus Managed Service Trust allows the individual to determine, in an entirely commercial manner, when he or she will become entitled to income. Hence when he or she will have to account for and pay tax on the income. The individual may, in practice, defer entitlement to income for a considerable period. Possibly until he or she has ceased to become resident in the UK or until he or she has passed away”.
So, what does that mean?
Well, what they are saying is that you get yourself a contract. Then you register as self-employed, go to work each day but then decide to put 80% or so of your money into a Trust either until you leave the country or until you die. You then pay tax on the 20% that’s left and class 2 and class 4 national insurance contributions. Obviously your next question is what the hell happens to your 80%? Good question! “In the meantime, the individual can draw on a credit facility. This is secured by a charge over the rights to income that has not yet become payable.”
Clear? Nope, thought not!
Basically, this means that you will be ‘loaned’ some money, against funds that have been put into the Trust, by another company. You would then be indebted but the ‘loan’ would not be taxable. So – one company takes most of your wages and then another company loans you back that same amount, less a rather large fee. You pay virtually no tax as long as the loan remains re-payable.
Does that really sound like sensible tax planning? Or does it sound more like a dodgy scheme that’s been put together for no reason other than to avoid tax??? To give you an idea – one illustration we have seen shows taxes paid to HMRC as £3,664.85 on a £100,000 contract ie 3.66% of the contract value. The scheme provider, on the other hand, gets £9,500 or 9.5% of the contract value.
So, what happens when it all goes horribly wrong?
This sort of thing: Offshore tax avoiders face £100million tax bill. The scheme in question was being operated via a family trust.
Or this type of thing: HMRC wins £156 million offshore tax avoidance scheme case. The tribunal in this case said that the money moved round in a circle and achieved nothing for the purposes of the relevant tax law.
Maybe it’s time to think twice before you look at any of these scheme’s. Before you end up owing more that you bargained for.
To find out more click here for HMRC’s policy paper on Tax avoidance loan schemes and the loan charge. Or to find out more with true life stories, please take a moment to read about Contractors Up The Creek.