Tax avoidance schemes
We understand that contractors who are required to use an umbrella company for an assignment may be disheartened by the projected take home pay – especially compared to contracting through a limited company. However, umbrella companies exist to ensure you pay the correct, legal amount of tax and National Insurance Contributions (NICs), and providing they’re compliant with HMRC – they’re acting in your best interests.
If you find yourself considering a role that’s inside IR35, we recommend you look into umbrella companies as a suitable payroll service. You’ll be subjected to PAYE – just like a permanent employee. However, you may be able to negotiate a higher assignment rate to take this into account. Either way, a compliant umbrella company will protect you from the threat of an HMRC investigation in the future – unlike tax avoidances schemes. Keep reading and we’ll explain why it’s so critical you avoid tax avoidance schemes at all costs. We cannot stress this enough – tax avoidance schemes are evil.
What is a tax avoidance scheme?
Tax avoidance schemes are companies that are set up to help workers pay less than their fair share of tax and NICs. If you use a compliant umbrella company, you should expect to retain roughly 55-70% of your earnings after all deductions are made. Therefore, any company offering you significantly more than this is probably a tax avoidance schemes.
Tax avoidance schemes include:
- Umbrella companies – Okay, so this is a little confusing, but hear us out. A huge majority of umbrella companies are fully compliant with HMRC and will process your pay legally and in your best interests. For example – just look for an FCSA accredited umbrella and you’ll be in safe hands. However, there are some unethical businesses out there that are claiming to be “umbrella companies” and they are offering people the opportunity to retain upwards of 90% of their pay. These are tax avoidance schemes and should be avoided. Remember the old saying – “if it sounds too good to be true, it probably is”.
- Loan Schemes – Some businesses are looking to take advantage of “legal”, but unethical loopholes in UK tax law, and Loan Schemes are the perfect example. But how do they work? Well, they’ll offer you a high take home pay retention because they’ll combine your pay with minimum wage, and a “loan”. This “loan” will be paid to you, without the need to pay it back (meaning tax is not covered). These may sound great but if HMRC discovers you’ve used one in the past – they’ll be after you and the unpaid taxes and NICs.
- Job Board Schemes – These are dodgy things! In the past, companies have offered their clients a combination of low pay (To avoid tax payments) and credits for a job board. These credits have then been exchanged into tax-free cash and paid to boost the clients pay retention. Sounds ridiculous right? These types of schemes sound so dodgy – you should run a country mile from them.
Ultimately, if you are working in the UK, you are responsible for paying UK taxes and National Insurance Contributions (NICs). Nobody likes receiving their payslip and seeing hundreds of pounds taken away by the government. However, this is life, and paying our fair-share is our responsibility. Therefore, is it really such a shock to hear that if you underpay tax, HMRC are likely to investigate and hold you accountable?
We recommend you visit the government’s website and read more about tax avoidance schemes.
Oh, and we have another suggestion – the government will always give companies that are under investigation a scheme reference number (SRN). Therefore, it’s worth your while checking that any umbrella you’re considering using doesn’t have a SRN.
Typically speaking, once HMRC discovers a tax avoidance scheme, they’ll issue it with a SRN. Then, they’ll go after the Directors. However, take it from us, the Directors aren’t stupid and will have done everything in their power to hide their identity. When the government is unable to find those responsible for operating the scheme, who do you think they go after next for the underpaid tax? Yes, you guessed it – the contractors who engaged with it.
What are the obvious signs that a payroll service is a tax avoidance scheme?
It’s pretty obvious – any company offering you a noticeably high take home pay retention! However, let’s look at some of the apparent signs that a company is a tax avoidance scheme.
- Take home pay retention – We’ve mentioned this numerous times, but let’s throw it out there once more – companies offering you a noticeably high take home pay retention should be avoided. Compliant umbrella companies will offer you a pay retention of roughly 55% to 70% – because this will ensure the correct amount of tax and NICs is sent directly to HMRC on your behalf. If you come across a company offering you higher pay retention (sometimes upwards of 90%) – they’re almost certainly a tax avoidance scheme.
- Unusual terminology – Many tax avoidance schemes will use weird wording, such as “we’re IR35 compliant”. What does this actually mean? The chances are – they’re trying to fool you and convince you that they’re compliant, when they’re not. If you want to find out whether a provider is compliant – check and see if they have a reputable accreditation, such as FCSA accreditation. We’ve also seen some companies boasting that they can help you “pay less tax”. Do you need a more evident sign that a company is a tax avoidance scheme?
- Location – Not all, but most tax avoidance schemes will be based offshore and in a known tax haven. Have a look and see where the company is based. If their headquarters is in the Isle of Man, the Channel Islands, the Cayman Islands, or somewhere else equally exotic – avoid, avoid, avoid!
- A fancy list of associated organisations – We’ve seen clear and obvious tax avoidance schemes boast that they work with some of the world’s largest organisations. However, let’s be realistic – they’ve probably copied and pasted a series of logos onto their website to trick you.
- Difficult to contact – Due to a majority of tax avoidance schemes being offshore, they’re probably difficult to get hold of via telephone. Have a look and see what support is available. Compliant umbrella companies should have dedicated lines for clients, new business, etc.
- They claim to be fully legal – Remember, tax avoidance is technically legal. However, HMRC is gradually outlawing individual schemes and are retrospectively recuperating tax from people who use them. Therefore, if a company is advertising their services as “fully legal”, they’re probably factually correct – but you should still avoid them like the plague. Down the line – engaging with them could cause you all kinds of financial problems.
- Fake testimonials – Loads of these dodgy tax avoidance schemes will include a fake quote from a guy called Trevor (for example) saying how wonderful they are. Again – how easy is it to fake a testimonial? Sadly – very! Don’t let testimonials mislead you.
What are the risks of using a tax avoidance scheme?
If HMRC realise that you’ve used a tax avoidance scheme, they’ll carry out an investigation. The likely outcome will be a substantial tax bill that will need to be repaid immediately. You may get away with tax avoidance for a few months, maybe a year, perhaps even a decade – but the chances are you’ll be held accountable at some point in the future, and we’re sure you’ll agree that nobody wants that hanging over them.
The government has started to name and shame tax avoidance schemes
The government has named a selection of tax avoidance schemes, and the list is frequently updated. We have summarised this list here. We have also provided information on each scheme. There are undoubtedly many more tax avoidance schemes out there, but the fact that HMRC is beginning to list the unscrupulous providers on their website (which they update regularly) is excellent. The new government advice is also a great way to help contractors and freelancers make better decisions regarding their payroll.
What is the Loan Charge?
The Loan Charge is a piece of legislation that sets out to help the government reclaim underpaid historical tax by workers. The legislation has come under much scrutiny because it has resulted in several honest workers facing life-changing tax bills. Heartbreakingly, a number of the workers facing tax bills were forced down the route of tax avoidance schemes by unethical third-parties. These include clients, accountants and recruitment agencies. Many affected workers have claimed they either had no idea they were using a tax avoidance scheme, or they had no choice. Disappointingly, HMRC has not shown any compassion.
Contractors who deliberately decide to engage with tax avoidance schemes knowing that what they’re doing is unethical should face retrospective action. However, it’s difficult to accept that integral workers are being punished for mistakes they were not even aware they were making.
Why should I only consider using FCSA accredited umbrella companies?
The FCSA is the UK’s leading professional body dedicated to ensuring the supply chain of temporary workers (contractors and freelancers) is compliant with HMRC rules and regulations. Companies must be able to prove they operate ethically and compliantly to obtain the prestigious FCSA accreditation. It’s also worth noting that every accredited company has been thoroughly audited and assessed, and all of the findings are openly disclosed to HRMC. We believe that if you’re looking for a compliant umbrella company to use for your payroll – you should only consider using a company with a prestigious accreditation, such as FCSA membership.
What should you do if you think you’re currently using a tax avoidance scheme, or you have used one in the past?
If you believe you are currently using a tax avoidance scheme, or have done in the past, HMRC is urging you to get in contact with them so that you can settle your tax affairs.
Top 10 umbrella companies
We’re here to offer you advice that we believe is in your best interests. Using a compliant umbrella company should be your number one priority, and all of our top 10 umbrella companies have achieved FCSA accreditation. Check them out for some awesome offers!