If you’ve been reading our recent blogs, you’ll have noticed that the issue of tax avoidance is headline news at the moment. “Joe Public” is fed up with the fact that he’s paying more tax than many “fat cats” earning 10 times his salary, and the government is introducing a range of anti-tax avoidance measures under the banner of GAAR (the General Anti-Abuse Rule).
In our previous blogs we’ve gone into quite a bit of detail in our assessment of GAAR, giving both an overview of how the legislation is structured and also how the recruitment industry should respond to it. It occurred to us, however, that we haven’t yet given those people that matter most – the individual contractors – a check list (read “danger list”) of features to bear in mind when trying to determine whether they should engage in a particular scheme or tax planning strategy. This was a gap we seriously needed to close, so what we’ve done here is put together a short-list of some of the things that should set a contractors alarm bells ringing. We’re conscious of the fact that some of our previous blogs may have been a bit on the dry side…after all, taxation and comedy don’t tend mix all that well – just ask Jimmy Carr! Anyway, this is our attempt to put a bit more of a light-hearted spin on things. Maybe…just maybe, a bit of humour will help the very serious message on its travels.
So, you should walk away when…
•It sounds too good to be true. This is an obvious one; if you’re quoted a retention that’s so high that you can’t even begin to figure out how they’ve done it, we’ll they probably haven’t…you’ll most likely get the tax bill at a later date (read the small print, I dare you!). Of course, sods law dictates that it’ll be after the scheme itself has disappeared in a puff of litigation.
•Artificial, contrived and complex arrangements are involved. Loopholes are tricky buggers; you can’t just casually stroll through them…they require you to contort yourself into all sorts of peculiar and unnatural shapes – be careful you don’t slip-up and have a nasty accident (but if you do, you’ll be grateful that “Joe Public” has paid his NI bill and kept the NHS up and running for you!).
•There are secrecy or confidentiality agreements. You’re not James Bond and the fate of the free world isn’t riding on your ability to reduce your tax bill! If your application to a tax planning strategy seems more like a job interview with “M”, then something isn’t quite right. Scheme providers with nothing to hide are generally quite open about how their solution works. Scheme providers with something to hide, however…
•The scheme is said to be vetted by a top lawyer or QC. This is a personal favourite of mine. There are hundreds of court cases every day in the UK…the conclusion of every one of those cases results in at least one legal professional being demonstrated wrong on a point of law. Don’t fall for the “vetted by a lawyer” spiel; lawyers argue the point they’re paid to support…you’re the only one who’ll get shafted if they don’t win that argument!
•The scheme is said to be approved by HMRC. This one’s really simple. HMRC “never approves any scheme” (yes, that is a quote from HMRC!), so anyone telling you that their scheme is approved by HMRC…well, you can work that one out for yourself.
• Offshore companies or trusts are involved for no sound reason. There are legitimate uses for offshore schemes and trusts…but if you’re a UK tax resident working in the UK, then there is no sound reason why your income from that work should be diverted via a trust or an offshore arrangement. You wouldn’t go for a meal at a Jamie Oliver restaurant and then expect to be able to make a payment at the McDonalds down the road simply because it costs you less, so why would you think you can work in the UK but pay tax on those earnings at a cheaper “venue”?
•The scheme involves a loan element. Some schemes work around the rules and avoid the tax due on your income by actually paying you your income in the form of a loan. The problem is, any loan that doesn’t require you to pay back the money fails the test of being a loan…which means it’s unlikely to succeed in its objective of being a sound tax and NI avoidance strategy. Any loan which does include provisions for you to pay the money back potentially does meet the criteria of being a loan…but clearly if there is a possibility of your loan being repayable, then you’ve actually put yourself in a position where you could end up having to pay back your earnings…so much for freelancing being a more lucrative career path than being a permanent employment!
• There is a requirement to take out insurance against the failure of the tax planning. Fail?!? If part of the process includes any kind of contingency plan in case things go wrong, then clearly this is an example of a scheme that’s sailing a little too close to the wind. If you’re playing by the rules then the concept of your tax planning “failing” just doesn’t come into the equation. What the scheme provider is really saying when they insist on you taking out insurance against the failure of their tax planning strategy is “Look, I don’t know if we’re going to get away with this…and if we get caught I don’t want you coming after me for the money you’ll lose!”. Instill you with confidence? I thought not.
Unfortunately, the sad reality is that we could go on-and-on listing the warning signs that you need to be wary of. We’ve covered the main ones here and hopefully that’ll give you a flavour of what tax avoidance is all about…and more importantly, how you can work out your own avoidance of “tax avoidance” strategy!
Oh, and in case you were wondering, the punch-line to the joke is “They can both stick their bills up their arse!”. Apparently it’s one of the jokes that Jimmy Carr used to try and resurrect his career after his tax avoidance scandal. It made me laugh…but I bet it never put much of a smile back on Jimmy’s face!
Established in 1995, Liberty Bishop is a specialist payroll and accountancy provider for the freelance market. Specialising in payroll and accountancy services that do not upset the tax man, we work closely with HMRC to keep our contractors and partner agencies safe and compliant.