Why would this scheme for getting revenue and paying less tax not work?

[dowjones123]

I am a contractor and working for a company X who would pay me say 300 pounds per day (so around 6600 per month). They don't care whichever way they pay me that. Contract is for 1 year and I don't care for any time after that - my focus is to minimize tax payout in 1st year only, fully abiding by current laws

I set up a limited liability company Y with say 25 shares (each with a par value = 1 GBP at time of registration) and each month X buys one share of Y from me (the director who at start holds all the shares) for 6600. This is done for 12 months, and at the end of 12 months, I have 13 shares in X and company Y has 12 shares in X. I have made a capital gain of 12*(6600 - 1) and I pay 20% tax on this as capital gains

So company X has no revenues, no expenses, no corporation tax. Me the director just has a capital gains and a CGT on it. In the end my aim is to get the money in my own account, which this scheme does.

Is there a flaw in this logic?

Thanks

[malvolio]

I am a contractor and working for a company X who would pay me say 300 pounds per day (so around 6600 per month). They don't care whichever way they pay me that. Contract is for 1 year and I don't care for any time after that - my focus is to minimize tax payout in 1st year only, fully abiding by current laws

I set up a limited liability company Y with say 25 shares (each with a par value = 1 GBP at time of registration) and each month X buys one share of Y from me (the director who at start holds all the shares) for 6600. This is done for 12 months, and at the end of 12 months, I have 13 shares in X and company Y has 12 shares in X. I have made a capital gain of 12*(6600 - 1) and I pay 20% tax on this as capital gains

So company X has no revenues, no expenses, no corporation tax. Me the director just has a capital gains and a CGT on it. In the end my aim is to get the money in my own account, which this scheme does.

Is there a flaw in this logic?

Thanks

You mean apart from it being a blatantly obvious artificial mechanism that HMRC will disregard as having no commercial basis? And that you still need to pay the tax on your earned income?

HTH

[Sausage Surprise]

I am a contractor and working for a company X who would pay me say 300 pounds per day (so around 6600 per month). They don't care whichever way they pay me that. Contract is for 1 year and I don't care for any time after that - my focus is to minimize tax payout in 1st year only, fully abiding by current laws

I set up a limited liability company Y with say 25 shares (each with a par value = 1 GBP at time of registration) and each month X buys one share of Y from me (the director who at start holds all the shares) for 6600. This is done for 12 months, and at the end of 12 months, I have 13 shares in X and company Y has 12 shares in X. I have made a capital gain of 12*(6600 - 1) and I pay 20% tax on this as capital gains

So company X has no revenues, no expenses, no corporation tax. Me the director just has a capital gains and a CGT on it. In the end my aim is to get the money in my own account, which this scheme does.

Is there a flaw in this logic?

Thanks

If that was in any way legal, then don't you think we'd all be doing it?

[minstrel]

I am a contractor and working for a company X who would pay me say 300 pounds per day (so around 6600 per month). They don't care whichever way they pay me that. Contract is for 1 year and I don't care for any time after that - my focus is to minimize tax payout in 1st year only, fully abiding by current laws

I set up a limited liability company Y with say 25 shares (each with a par value = 1 GBP at time of registration) and each month X buys one share of Y from me (the director who at start holds all the shares) for 6600. This is done for 12 months, and at the end of 12 months, I have 13 shares in X and company Y has 12 shares in X. I have made a capital gain of 12*(6600 - 1) and I pay 20% tax on this as capital gains

So company X has no revenues, no expenses, no corporation tax. Me the director just has a capital gains and a CGT on it. In the end my aim is to get the money in my own account, which this scheme does.

Is there a flaw in this logic?

Thanks

Nice try.

X buying shares in Y is not an expense allowable against Corporation Tax, so the £6,600 per month would have to paid out of post tax profit. X would effectively have to earn £8,250 and pay 20% CT before it could pay out the £6,600.

I think all you're doing in your scheme is ignoring the tax "cost" of getting £6,600 per month into company X.

If company X has no revenues how did it get the money to pay you £300 per day in the first place?

[dowjones123]

Nice try.

X buying shares in Y is not an expense allowable against Corporation Tax, so the £6,600 per month would have to paid out of post tax profit. X would effectively have to earn £8,250 and pay 20% CT before it could pay out the £6,600.

I think all you're doing in your scheme is ignoring the tax "cost" of getting £6,600 per month into company X.

If company X has no revenues how did it get the money to pay you £300 per day in the first place?

Thanks that was a genuinely good point. I'm not trying to do something illegal but just as a good student of accounting trying to understand what the theory says about this scheme. Its an academic exercise only

When I said "So company X has no revenues, no expenses, no corporation tax.", I meant "So company Y has no revenues, no expenses, no corporation tax."

Thanks for the replies again - I take your point on X having to take the money out of post-tax profit, so the pre-tax cost would be higher than 6600 per month. Any other thoughts? Thanks

[minstrel]

Thanks that was a genuinely good point. I'm not trying to do something illegal but just as a good student of accounting trying to understand what the theory says about this scheme. Its an academic exercise only

When I said "So company X has no revenues, no expenses, no corporation tax.", I meant "So company Y has no revenues, no expenses, no corporation tax."

Thanks for the replies again - I take your point on X having to take the money out of post-tax profit, so the pre-tax cost would be higher than 6600 per month. Any other thoughts? Thanks

It's always good to test tax saving theories.

People are sometimes disparaging of new tax saving ideas on here. I don't think this one works, but don't stop trying

At the end of the day even the low salary/high dividend strategy was a new idea at some point and I imagine at the time a lot of people said that wouldn't work or broke the rules.

From my experience if you do the low salary/high dividend strategy, rack up as many expenses as possible, and close the company every few years and extract cash as a capital distribution you end up paying 10%-15% total tax and that seems as good as any other more exotic scheme to me.

[BlasterBates]

Yes but the high dividend low salary solution has lead to a quite a number of sleepless nights for a lot of people. IR35 exists precisely because of that. In the end it would have been much better if everyone had paid themselves reasonable salaries and saved a bit of tax, and then everyone could sleep at night and save all the expenses of insuring themselves or the pain of getting into a failed scheme.

We don´t know how they target contractors for investigation but I have a theory that if you pay yourself a reasonable salary you probably won´t end up on their target list.

[philip@wellwoodhoyle]

In the end it would have been much better if everyone had paid themselves reasonable salaries and saved a bit of tax

It's not tax that's the issue - tax should be about the same either way ignoring timing issues. It's the 23% national insurance cost (employers plus employees) that's the killer with payroll. Take another £10k in payroll, and you pay £2.3k to HMRC in NIC.

The low salary/high dividend route didn't just happen overnight nor was it anyone's bright idea. It evolved over many, many years as the tax/nic/benefits rates and rules have changed. Probably one of the biggest "unforeseen consequences" of civil servants and politicians meddling with taxes without properly understanding the behavioural aspects.

Going back in time, there would have been periods when it only worked at certain income levels, so wasn't really a problem. I certainly remember doing all kinds of what-if scenarios over the last 30 years when advising clients.
But these days, it's hard to visualise any scenario where the low salary:high dividend route isn't beneficial (except if you're caught by IR35).

[Jessica@WhiteFieldTax]

[QUOTE=dowjones123;1668066I have made a capital gain of 12*(6600 - 1) and I pay 20% tax on this as capital gains[/QUOTE]

It would be 28% CGT, less annual exemption £10,600 (current).

Is there a flaw in this logic?

As others have said, you've missed the aspect of Corporation Tax in first company on the monthly revenues.

Also - and a big also - consider HMRC Transactions in Securities rules:

CTM36805 - Particular topics: transactions in securities: tax advantage from - introduction et seq

These impact hugely on a scheme like this, and are widely written, arguably too widely.

[BolshieBastard]

Yes but the high dividend low salary solution has lead to a quite a number of sleepless nights for a lot of people. IR35 exists precisely because of that. In the end it would have been much better if everyone had paid themselves reasonable salaries and saved a bit of tax, and then everyone could sleep at night and save all the expenses of insuring themselves or the pain of getting into a failed scheme.

We don´t know how they target contractors for investigation but I have a theory that if you pay yourself a reasonable salary you probably won´t end up on their target list.

Well, some people may have slept a little easier at night but this way does not lead to hmrc shysters ignoring you as an IR35 target.

Im sorry but your theory (how the shysters select IR35 investigations) is wrong. They use a combination of evidence from previous and current returns, regional location, simple statistical data ie does you company number \ NI Number \ Tax Reference end in certain digits and, literally, random choice.

When I worked in benefits administration, we used to get main frame printouts of claims records and applied these principles to select 'random' benefit claims for investigations. We also had tip offs from joe public but, I dont think the shysters get many of these regarding adherance to IR35