Contractors and Freelancers, and other temporary staff are being offered ‘too good to be true’ schemes all the time, usually providing amazing take home pay rates. Why shouldn’t you use them?
The quick answer:
What’s wrong with using a clever way of reducing tax? These kinds of schemes or arrangements don’t work. If someone tells you they have a way of reducing the tax you have to pay, that other people can’t match, they’re usually not telling the truth. If full tax and national insurance is not being taken from your pay, something is wrong! You can’t just decide whether or not to pay these taxes.
Why is that my problem – I’m not running the scheme? Because by law, everyone has to pay HMRC what they owe. If you have allowed yourself to be paid in a way that tried to ‘get around’ paying the right amount, HMRC will come knocking. They may go after the people running the scheme too, but often they’ve disappeared, and anyway, that won’t stop them going after you.
My agency wouldn’t let me use something bad though – and I can go back to them if there’s a problem can’t I? Sometimes, agencies don’t realise that some of the providers they are using are involved in aggressive schemes. Sometimes, they’ve been lied to as well. This stuff is complicated – they may just not realise that there’s a problem. And how do you know they’ll be around to help years later?
Everyone’s doing it though aren’t they? No, they aren’t. HMRC are challenging the worst schemes more and more, and having more and more success. A recent case was won more than 10 years after it was used. It doesn’t make sense to use a scheme that will keep you awake at night for years afterwards. Use a proper provider – for example, an FCSA accredited one. And use one that’s been around for a long time. People running aggressive schemes often don’t last that long…
Want more on the detail? Then read on…
The detailed answer:
Since there have been taxes, there has been tax avoidance, or tax evasion. In current UK law these are two separate things:
Tax avoidance – structuring your affairs or transactions in such as way as to minimise tax. Some of these are perfectly acceptable (and accepted by HMRC), such as using an ISA investment product, or claiming rent-a-room allowance. Some are more aggressive such as some of the ‘schemes’ that have been reported on recently – some film partnerships and other complex arrangements, that to be honest most of us don’t understand anyway.
At the aggressive or complicated end of the spectrum, HMRC can and do challenge these arrangements. So, tax avoidance is on a spectrum, with a comfortable ‘safe’ end, and a more risky, complicated end. At this end of the spectrum, you’re much more likely to get a knock on the door from HMRC.
Tax evasion – This is just not declaring all your income, or other proceeds, profits or gains. So this is not attempting to reclassify or protect income to minimise tax, it’s hiding some or all of these profits or income or other gains, so no tax is paid.
Avoidance in the contracting world
So we know that some kinds of avoidance are aggressive. How do these things work in the freelancer and contractor world? A hallmark of an aggressive scheme is that a basic transaction, such as getting paid a weekly wage, becomes more complicated than it should be. For example, money doesn’t just go from the engager to the agency and to the worker. If it doesn’t, ask yourself why?
If there’s no real reason (commercial basis) other than ‘something to do with tax’, then use extreme caution. HMRC will rightly challenge arrangements where the structure is designed to reduce tax and for no other purpose. And increasingly they win – see their spotlights which are full of examples of contractor schemes gone wrong.
For a payrolled worker, what you often see is a payslip where some of the pay is not taxed in full. Perhaps it’s described as a bonus, or a marketing contribution, or a loan, or something else. Normally some of your pay will be taxed – this unfortunately reassures us that things are being done properly. But you should have the amount of tax checked – if it’s not all of your pay, why not?
At some point in the future, HMRC will want the tax that wasn’t collected. If that money was passed to someone else, who then lent it to you, tough. HMRC will find that the money was really pay, and you’ll have to find the tax. The scheme provider will have left the country or disappeared. The tax wasn’t paid – HMRC will come to you.
Limited company contractors
The other ‘classic’ avoidance system operates where a contractor generates an income stream which would usually be paid into their company as turnover. Instead, either this turnover goes somewhere else and only a small portion is returned to the company (and some other money finds its way back to the individual), or all the turnover (sales) is received by the company, but the company pays on a consultancy fee or similar to a third party. Then, some of this money finds its way back to the individual.
In both of these cases the reason you should be worried is clear – there’s no commercial basis for these transactions – the only or main reason they’ve been structured this way is to avoid tax. Accordingly, HMRC will go after them.
Other things often come up when an avoidance scheme, which might be dangerous, is offered. Many schemes have DOTAS numbers – this is a reference issued by HMRC – and the schemes sometimes suggest that this feature is something that should reassure the contractor. But the reason the DOTAS number has been issued is to enable HMRC to identify schemes which are high-risk or complex – hardly something that should reassure a contractor.
Another common feature is a claim that the scheme or system has Counsel’s Opinion supporting its validity. But all this means is that one senior legal expert has been able to issue a document arguing that the scheme is safe. One! This, again, shouldn’t really make anyone feel very secure. That legal expert is very unlikely to turn up at a tax tribunal to support a contractor years later.
Since September 2017, it’s also important that the whole supply chain is comfortable about the quality of all of its parts. The new Criminal Finance Act requires that end users, agencies and others take appropriate steps to ensure things are done properly. Agencies and others are more and more likely to have to demonstrate to the rest of the supply chain and others what measures they’ve taken to deal with these risks.
An historic point
Twenty years ago, taking part in avoidance schemes was seen as fair sport by many. If caught, they suffered a bill for the avoided tax, some interest to pay, and often little else. They weren’t normally caught and so dabbling in tax avoidance was seen by some as well worth it.
Nowadays, the fines can reach 100% of the tax avoided, interest will be due and you run the risk of naming and shaming. HMRC are closing more of these schemes, and working more cleverly all the time. Cases still take a long time to get resolved, but HMRC usually get their money in the end.
So, if it ever was ‘worth a go’, it’s not any more.
At JSA we don’t use aggressive schemes and we don’t think that’s the way to run your business. We focus on doing our job professionally and efficiently. If you have a skeleton in your closet from the past we can help, but we won’t recommend any solution that doesn’t feel right.
To speak to an advisor or an accountant, call 080025 26 40 or visit www.jsagroup.co.uk