This is a guest blog by Umbrella Company Parasol.
The perils of being caught up in a tax avoidance scheme have been well documented in recent years. These vehicles, which are set up with the sole aim of avoiding tax, bend the rules of the tax system in a way that the government never intended for and pose big risks to anyone who enters one - even if by accident.
Work through a tax avoidance scheme and you may find yourself under investigation from HMRC and end up having to pay a lot more than the tax that you tried to avoid once retrospective tax payments, fines and even interest are all totted up.
So needless to say, freelancers, contractors and umbrella employees need to know what a tax avoidance scheme is and how to steer clear of one. But how do you recognise a non-compliant arrangement? What are the hallmarks of tax avoidance schemes?
Too good to be true
If it sounds too good to be true, chances are that it is. Many tax avoidance schemes claim that with their help you can compliantly take home upwards of 85% of your income after tax. This is unrealistic without some kind of tax avoidance or illegality taking place somewhere along the line.
Tax avoidance schemes often pay people through loans, annuities, bonuses or shares that the promoter may claim to be ‘non-taxable’. In other words, they advertise that tax doesn't apply. This simply isn’t true given any income above the personal allowance threshold is subject to tax.
You may have heard of the Loan Charge, which was a retrospective tax introduced by the government in 2019, affecting people who had operated through tax avoidance schemes dating back as far as 1999. These contractors, who were paid via ‘non-taxable’ loans, often bought into these schemes on the basis that they were compliant. In short, HMRC decided they weren’t and a reported 50,000 individuals were told to pay back missing Income Tax and National Insurance Contributions.
Confusing payment arrangements - whether through loans or offshore trusts - that you struggle to make head or tail of, should be avoided. So be wary of complicated processes that divert money through a chain of companies, trusts or partnerships. And if your contract doesn’t clearly state how your income will be paid or detail all deductions, it could be a tax avoidance scheme.
Many tax avoidance schemes claim on their website to be ‘HMRC approved’ - you might notice a stamp of approval somewhere on the site. The problem, however, is that HMRC never endorses schemes. So beware of any provider that says it has been endorsed or certified by the tax office.
Difficult to contact
Tax avoidance schemes targeting contractors operate in the shadows and you are likely to struggle to find out much information about the business. If you want to do some digging into a particular tax avoidance scheme you’ll do well to find anyone to speak with or contact. In many cases, these schemes make very little information available deliberately so as to avoid having to answer difficult questions about their legitimacy and keep a low profile.
On HMRC’s radar
With tax avoidance schemes seemingly on the rise in recent years, HMRC are unsurprisingly clamping down on them and a number are under investigation. The schemes that HMRC believe have the hallmarks of tax avoidance arrangements are listed on the government website. It goes without saying that if you have any concerns, walk away.
Does all of the above apply to businesses?
Not necessarily. There are still many unscrupulous businesses out there promoting schemes that claim to avoid tax and often these are short-lived. Whilst many will bear the majority of the hallmarks above, the one thing they will all have in common is a claim to reduce your tax bill by using contrived payment arrangements.
If you are a contractor or freelancer that is looking at using an umbrella company, you should be paying employment taxes on all of your income. Any arrangements that suggest otherwise are not worth your time, or the risk.