When offshore contractor tax ‘schemes’ put their UK variants in the shade
Reams have been written about tax or remuneration schemes here in the UK, preying upon the reduced financial lot of the hard-working contractor – and the potentially even more reduced lot shortly, due to IR35 reform in the private sector.
But, writes Kevin Austin, managing director of Access Financial, what about schemes you ought to avoid when contracting overseas? What these look like; where they can prove life-destroying and how they make themselves tempting to contractors are all topical questions, given that research shows that the aforementioned reform from 2020 is going to make a fair chunk of you flee abroad.
As we’ve said previously but should repeat now, it’s not just the misguided off-payroll working rules in the private and public sectors which are, paradoxically, working against HMRC when it comes to these schemes. It’s mainly continental Europe’s generally higher tax liability that gives these ‘arrangements’ a seductive foundation.
Seeing through what overseas scheme providers say
But the very first thing to realise is that if the contractor remains UK tax resident, then any or all of the schemes you’ll likely be touted will come to absolutely nought, because UK taxpayers continue to be liable to tax on their worldwide income.
Rule of thumb: any scheme that suppresses income from the gaze of the authorities in the country of work – in the EU or further afield -- is unlawful.
The problem is ‘suppress your income from the gaze of authorities’ isn’t a very convincing strapline or marketing blurb that UK contractors would sign up to! So the providers take a different approach. For example, and this is oversimplified but ‘avoid the hassle of registering locally’ is a more palatable message. But the upshot is the same – you will be suppressing your income from the gaze of authorities if you fail to register in the work country, or presented misinformation to the tax authorities.
How they 'reduce your income'
Then, there are the providers’ means of reducing income. These can include:
- Using a credit card charged by a sponsor from monies owed by the contractor
- A single contract made up of two separate contracts where only one part of the whole is submitted to the tax authorities
- Entirely bogus ‘Share Schemes’
- Payment in ‘Options’
- Loan schemes
- Employee Benefit Trusts
In the UK, maximising your take-home pay is the calling card of dodgy schemes, promising 90% and the like. Well it’s not quite as prevalent when you contract abroad. In fact, it’s quite a while since we have seen anything peddled over 85%. There will be exceptions now I’ve said that but in the main, these type of schemes have gone underground, tending now to be marketed -- and sold -- by word-of-mouth.
Approved? Notified? Hedged!
The ‘approved’ badge (often seen in the UK variants’ ad banners) is still doing the rounds. Loan schemes still persist under the guise that either HMRC has ‘approved’ them or that they have been ‘vouched for’ by a prominent tax barrister. As we all ought to know by now, HMRC never approves such schemes and will take action against arrangements that do not carry a tax scheme reference, just as they will take action against those that do.
As to the relevant ones, it’s notices under S312(6) and S312A(4) FA 2004 – concerning Promoters and Clients
Clients and parties who have received these scheme reference numbers (SRNs) no longer have a duty to notify the SRN to HMRC on their tax returns or on form AAG4 from the date shown below. Otherwise, they do.
Let’s look at another way for you to consider the providers’ ‘approved’ claims. Keep in mind, tax authorities seldom bind themselves in this way – to say something akin to, “We, the taxman of ‘x’ country, give this ‘y’ company or scheme, our blessing/approval/endorsement to its ‘z’ scheme.” Similarly in the UK, HMRC has no power to bind the Treasury. Authorities are not naïve, and they fully understand that when approvals are sought, the applicant (typically the scheme provider) will have been selective in the information that they provide to get the answer they seek. So at the very least, any kind of approval, if obtained, from a barrister or higher authority, would be hedged with caveats.
Your return from tax evasion
So what are the risks involved? Unfortunately, the risks for UK contractors are many.
Prosecution under the Criminal Finances Act 2017, where the fines are unlimited. These can be on top off penalties for UK tax evasion. Depending on the circumstances, tax evasion can result in substantial fines and the maximum penalty for tax evasion in the UK can even result in jail time. Punishment and the average tax evasion sentence can vary, so below are a few examples of penalties that can be incurred:
- Income tax evasion penalties – summary conviction is 6 months in jail or a fine up to £5,000. The maximum penalty for income tax evasion in the UK is seven years in prison or an unlimited fine
- Evasion of VAT – in magistrates court the maximum sentence is 6 months in jail or a fine up to £20,000. Crown court cases can be a maximum of seven years in prison or an unlimited fine
- Cheating public revenue – due to the severe nature of the crime, the maximum sentence for defrauding public revenue in the UK is life in prison or an unlimited fine
- Providing false documentation to HMRC – either magistrates' court or as a summary conviction, HMRC tax evasion penalties can range from a fine of up to £20,000 or up to 6 months in prison
- Evasion of duty (smuggling) – for a summary conviction the maximum UK sentence is a fine up to £20,000. Crown court cases can be a maximum of seven years in prison or an unlimited fine.
Hallmarks of schemes to steer clear of
So, you can’t afford not to know what these schemes when you’re contracting overseas look like. Be aware, they can range from looking totally innocuous to thoroughly outlandish.
Here are the red flags:
- Retention greater than seems reasonable
- Extravagant fees being charged
- A ‘charged credit card’ to use is offered (remember; credit card transactions are traceable with location and date-stamp)
- Talk about ‘loans’ or ‘losses’ to reduce your tax
- Encouragement to expense (invisible) items or issue (unreal) invoices
Final thoughts (includes recruiters)
Almost needless to say, it’s top-drawer tax advice or professional support you need if you get taken in by these bottom-feeders. By this need to reach out, we don’t mean enlisting your recruitment partner to help, although it should be noted that most agencies have no interest in promoting such schemes, particularly since the CFA took effect in September 2017.
That said, the power of a referral fee or other inducement to introduce contractors to such structures can tempt agencies and, worrying for the reputable, these will often be under the radar of the recruitment business's management. Directors of agencies have the responsibility to ensure that processes are in place (and kept in place) to prevent the promotion of tax evasion. It’s not only for contractors for whom feigning ignorance will not wash.