As a contractor, the idea of retaining over 90% of your hard earned money may sound exciting. However, you are required to pay tax and National Insurance in accordance with HMRC’s regulations. Sadly, there are more and more companies out there who claim to be able to help contractors retain a majority of their earnings – and they even go as far to say that their service is HMRC approved. These are offshore intermediaries promoting tax avoidance, and it is critical that contractors do not get tempted by them. This article will explain why.
What is an offshore intermediary?
An offshore intermediary is a company located away from the United Kingdom (UK) that that has the sole intention of maximising workers’ pay retention by helping them avoid tax and National Insurance Contributions (NICs). Whilst tax avoidance is not technically illegal (tax evasion is), HMRC is increasing its efforts to crack down on companies promoting tax avoidance, as well as targeting workers who have used or are currently using them. Any outstanding tax and NICs that have not been paid can be retrospectively demanded by HMRC, and the punishments for tax avoidance could be life-changing. HMRC can even backdate their demands for unpaid tax and NICs – even if the offshore scheme that you used has long since disappeared.
Examples of offshore tax avoidance schemes
There are many different offshore intermediaries operating. Here are a few of the most common types:
- Loan Schemes – the worker receives a loan on top of a minimal salary as a way of avoiding tax and NICs.
- Job Boards – the worker receives a minimum wage with the rest of their salary consisting of loyalty points for a job board. These loyalty points are then exchanged for cash – tax-free.
- Pension Schemes – the worker sends some of their salary offshore as part of a pension pot and then collects the full amount – tax-free.
What are the punishments for using an offshore intermediary?
If HMRC believes you have been using a tax avoidance scheme, they may require you to pay 100 percent of the amount they believe you owe, as well as an undefined fine – within 90 days. On top of this, you could face significant legal costs if the case goes to court. Did you know that the tax avoidance scheme may also try and demand money from you to help them fight their legal case?
HMRC encourages users of tax avoidance schemes to get in contact with them immediately so that a fair arrangement can be drawn up to repay the outstanding tax and NICs. Don’t forget, “HMRC wins more than 8 out of 10 avoidance cases heard in court and your tax affairs might become public as a result of court proceedings.”
Are UK contractor accountants legal?
Providing they operate compliantly with HMRC legislation and do not promote tax avoidance or evasion – yes.
Compliant contractor accountants in the UK will help you come up with a careful and proactive tax plan that will help you legally minimise your tax and NI burden by compliantly abiding by UK law. This is different to offshore intermediaries, as offshores look to exploit loopholes in the UK tax system and unethically encourage their workers to take advantage.
How can you check your accountant is compliant?
As a freelancer, contractor or small business owner, it is vital that you use an HMRC-compliant accountant to ensure you pay the correct income tax and NICs. As you have read above, the repercussions for engaging with a tax avoidance scheme can be huge and as a result, your life could be turned upside down.
When choosing a contractor account, make sure they abide by the following:
- They offer a realistic take-home pay projection.
- They appear to be experts and can provide you with important information about the UK tax system and how to legally comply with UK laws.
- They do not try and convince you to claim excessive expenses.
- They have a 100 percent compliance record with HMRC and have not been assigned a Scheme Reference Number (SRN).
- All of their activities take place in the UK.
- They have clearly written content on their website and blog articles explaining the risks of tax avoidance.
- They work with other companies in the industry who have a positive reputation, such as advisers and insurance providers.
- They have a good reputation within the industry and are owned by professionals with plenty of experience.
When you request an umbrella company calculation (if you ever require one), make sure the figures give an honest reflection of your earning potential and take PAYE into account.
Is your recruitment agency ethical?
Recruitment agencies in the UK are required by law to assist HMRC with their efforts to eliminate tax avoidance. The Finance Act 2014 stated that where a recruitment agency is involved in the “contractual chain”, they must be responsible for their candidate’s PAYE and NICs.
The Criminal Finances Act 2017 came into effect in September and further highlights HMRC’s intention to punish recruitment agencies who facilitate tax avoidance. Did you know that if a recruitment agency refers you or any candidate to an offshore intermediary, the managers and directors could face a custodial sentence and the agency could be on the receiving end of an unlimited fine?
If you are concerned that you have been referred to a non-compliant payroll provider, you must contact HMRC and let them know immediately.
How much could you be legally taking home?
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