By-products of the introduction of the Intermediaries Legislation (IR35) were the creative and complex schemes offered as a means of working as a freelancer, but not through your own limited company and so not having to worry whether your engagements were ‘inside’ or ‘outside’ IR35.
These were often sold to gatherings of contractors who were encouraged to sign up because of the vast tax savings, but they were promoted through online via tax advisers and even at avenues like airports with considerable contractor passenger traffic.
The HMRC view
However, for almost as long as these schemes have been in place, HMRC has had a unit based designed to tackle these schemes methodically and rigorously. HMRC makes this very clear:
HMRC will always challenge tax avoidance schemes. If you are involved in an arrangement like this (a loan scheme), you’re highly likely to be avoiding tax and you could end up paying additional tax, National Insurance contributions and interest. Penalties may also apply.
Our advice to you would be not to engage with the schemes, but we will consider some of the features of these schemes and what to look out for.
Who is promoting the scheme?
Perhaps the question should be why is the scheme being promoted? Particularly as HMRC have been pursuing schemes to collect unpaid tax with great success. FSB Tax Investigation Protection is being contacted almost every day by contractors who have been challenged by the taxman. The reality is that there may be opportunities to mitigate the ultimate tax bill if HMRC have made estimated assessments or have assessed for years which are out of time and are unprotected, but the likelihood is that there will be a tax bill!
If you are still minded to investigate, then speak to your accountant or adviser and have a look online what others say. It would be surprising if the response you received was anything other than “Don’t”.
HMRC approved!
You may read that a scheme is “HMRC approved”, but why would HMRC approve schemes designed to avoid tax? HMRC’s role is to collect the right amount of tax, not to approve schemes which avoid it.
The same Spotlight 45 makes this point:
Previous users of avoidance schemes were told that their arrangements were HMRC compliant, but later found out, to their cost, this was not true.
For some people the cost has sadly been not only the stress of an HMRC enquiry, six figure tax bills, loss of their life savings, even their homes, as well as the human cost of marriages which have not survived the ordeal.
Payment of Fees
Quite often the scheme will require the payment of fees to enter into it. These fees will be non-refundable and tend to reduce after the first year. Interestingly, these fees will often be a contribution towards an HMRC challenge to the arrangement. That is a warning sign that the scheme is not guaranteed. There is no guarantee that the scheme provider will go to the ends of the earth to defend your position. After all, you are the taxpayer, so you will be the person responsibility for any tax due - not the scheme provider.
Increase your take home pay!
If you come across an advert that offers you the ability to retain 80 per cent or 90 per cent of your take home pay, ask yourself this:
“If the minimum rate of PAYE is 20 per cent, and all employees earning above minimum earnings thresholds of around £9,000 per year have to pay National Insurance Contributions limits, how is it even possible that as a relatively well earning contractor I can retain even 80 per cent of my pay?”
It’s a loan (which doesn’t need to be repaid)
Typically, many schemes have involved the use of loans. The contractor receives a small payment upon which PAYE is paid and then a larger sum which is deemed not to be subject to tax or NICs. This larger amount is a loan (which you will never be asked to repay) and which has potentially been routed via a myriad of companies or other entities like a trust. Perhaps the money was even routed overseas before it is paid to you.
Questions to be asked would be:
- When did getting paid become so complicated?
- Why is some money coming through payroll and some via other means?
- Why would money owed to you for services rendered be paid to you as a loan?
- And if the loan is not repayable; how is it a loan?
Final thoughts
In order to offer some context to the way that tax avoidance schemes are generally viewed by HMRC, you only need to consider the hardening of language which turned the initial consultation in the late 1990s for a “General Anti-Avoidance Rule” to the July 2013 introduction of the “General Anti-Abuse Rule” (GAAR).
The GAAR is a counter-measure against a tax arrangement which creates a tax advantage as one of its main purposes and which is considered ‘abusive’. This means that the arrangement entered into is one which HMRC can demonstrate ‘cannot reasonably be regarded as a reasonable course of action’.
The various avoidance schemes aimed at contractors come into this category, and those who have entered into these schemes have largely ended up paying more than they tried to save. HMRC offers useful guidance and this is well worth reading.
However, let us finish with that time-honoured phrase and which we’ll let you complete: If it looks too good to be true…