Contractors' Questions: Is this tax scheme too good to be true?
Contractor’s Question: A company that seems to be based in Switzerland but which serves the UK contractor market is claiming they’d be able to get me an 83% return on my daily rate.
The company explains I would retain my own limited company but would then work for them, or a partner company/agency. As a result, they say I would enjoy the benefits of being under the company umbrella; would not pay corporation tax and would get 83% of my monthly rate to myself, after tax.
Following this article on ContractorUK about similar claims, I am nervous about proceeding with this offer, partly because it sounds too good to be true. Can you suggest whether this arrangement is legal, or is it one that HM Revenue & Customs would be unhappy about?
Expert’s Answer: Assuming the company you are enquiring about is in fact based in Switzerland, your first task would be to establish the contractual arrangements that would be in place between any agency that you work with and the scheme provider. If there were to be such an arrangement then the legislation regarding Offshore Intermediaries could have been contravened which would leave the agency liable for PAYE tax and NI payments on your earnings and penalties from HMRC.
Compliance is a very hot topic within the industry currently and I would think it unlikely that an agency would be willing to risk in engaging with an offshore scheme provider.
Your second task would be to establish the exact mechanism of the scheme that’s being offered to you. Historically, and in light of basic details about the company you made available (and which I have verified), the company operates variations on the theme of Limited Liability Partnerships.
Be aware that HMRC targeted LLP arrangements recently, and there have been changes to legislation which means that the tax advantages of an LLP can only be used when an individual’s work actually has an effect on the partnership’s profits; they have a ‘significant influence’ over the affairs of the partnership and if their capital contribution to the partnership is more than 25% of their earnings.
In the situation you describe, your role would be akin to that of an employee of the partnership and therefore you would have no entitlement to any tax advantage. HMRC is particularly opposed to schemes which involve ‘sham’ arrangements.
In your case, however paperwork was arranged, you would still be working for a third party i.e. someone other than the scheme provider, you would be working in the UK and would remain tax resident in the UK (assuming that’s your current situation), and you would therefore be liable for UK taxes and subject to UK tax legislation, including that introduced to stop tax avoidance within Limited Liability Partnerships.
With regard to whether or not HMRC would be happy about you using such a scheme, if you type the name of the company into Google, the second entry takes you to HMRC’s website and a page headed ‘Avoidance Schemes Currently in the Spotlight.’ There appears to be no mention of the company on the page and it could be a coincidence but I think that’s unlikely. I think you will find the link useful though as it lists the mechanisms used by avoidance schemes that the taxpayer should be wary of:
- It sounds too good to be true
- Artificial or contrived arrangements are involved
- It seems very complex given what you want to do
- There are guaranteed returns with apparently no risk
- There are secrecy or confidentiality agreements
- Upfront fees are payable or the arrangement is on a no win/no fee
- The scheme is said to be vetted by a top lawyer or accountant but
no details of their opinion are provided
- The scheme is said to be approved by HMRC (it does not follow that
this is ever true as HMRC does not grant approval to schemes)
- Taxation of income is delayed or tax deductions accelerated
- Tax benefits are disproportionate to the commercial activity
- Offshore companies or trusts are involved for no sound commercial
- The involvement of professional trustees is claimed to guarantee
that the arrangements succeed
- A tax haven or banking secrecy country is involved without any
sound commercial reason
- Tax exempt entities, such as pension funds, are involved
- It contains exit arrangements designed to sidestep tax
- It involves money going in a circle back to where it started
- Low risk loans to be paid off by future earnings are involved
- The scheme promoter lends the funding needed
- There is a requirement to take out insurance against the failure
of the tax planning to deliver the tax benefits.
The expert was Roger the retired taxman, an adviser to All Umbrella Companies Are Equal.