For over 12 years there have been numerous “tax-efficient schemes” designed and promoted to the UK contractor market place and further afield by scheme providers and promoters. Most have come and gone as the Treasury and HMRC increasingly clamp down on anything perceived as “tax avoidance”. Here we are in 2019 and despite the HMRC implementing legislative changes and the likes of the loan charges it hasn’t changed the appetite of the market for a high take-home pay offering regardless of the potential outcome.
A short “history lesson” of contracting schemes…
Whether you’re new to contracting or an old hand, picking your way through the minefield of “solutions” “products” “schemes” or “strategies” can be confusing. Long term contractors will remember the introduction of the IR35 rules which introduced the concept of “deemed employment”.
IR35 targeted those cases where an employee resigned on Friday and then returned to his or her desk the following Monday, to do exactly the same job but under the guise of a one-woman/man company. In response to that came the “composite” schemes, where a number of contractors became shareholders of one company, run by a provider. These schemes were closed by the managed service company legislation.
Then came the “disguised remuneration” rules, which removed any advantage of drawing “soft loans” from employee benefit trusts. Attention turned to schemes where UK-based contractors were employed by intermediaries based offshore – these schemes don’t work, and probably never have as the legislation which catches them dates in its original form more than 70 years.
A few years back we had the revenue concentrating on so-called “false self-employment”, where contractors up to semi-senior level whose services were provided via intermediaries but didn’t have sufficient autonomy to decide how a job is done for them to be considered businesses in their own right – and so were deemed to be employees.
Whether you’re a contractor trying to decide how best to set yourself up, or an end-client or agency concerned about how your engagement of contractors might affect your business’s exposure to risk, you will know by now that a few things are important, even more so since the Criminal Finance Act came and put the fear of God unto the majority of agencies waiting for their next audit.
Basically, you will want to know that any contracting mechanism you engage with is safe and unprovocative and that it won’t give you any nasty surprises with HMRC such as onerous reporting or worse.
In short, you will want peace of mind!
The new tax landscapes
As we all know, HMRC has had a few new tools added to its armoury in recent years. The DOTAS and POTAS regimes have been around for a while – requiring notification of schemes or arrangements designed to achieve a “tax advantage”. And don’t forget there is the “general anti-abuse rule” (GAAR), which is being used to attack tax planning arrangements that HMRC considers unacceptably aggressive.
Things we don’t like here at Tailored Services
There are quite a few things we don’t like about most of the contracting solutions and schemes still being marketed. In fact, the easier question to answer would be, “What do we like about most schemes that offer 85%+ returns?” The short answer would be “nothing”… So what are the warning bells that you should run away from when you hear them ringing?
- You’re only entitled to a pittance of a salary. Many contracting solutions work as follows – you sign up to provide your services via an intermediary (Umbrella) who will then bill the client or agency the full contract value. But your contract with the intermediary only entitles you to a fraction of that – typically the minimum wage or slightly above. You are then left dependent on receiving “discretionary loans” and “annuity” or perhaps something similar from the intermediary or some other party. If you put yourselves in HMRC’s shoes, you’re immediately going to think there is something fishy going on here. We think it likely that the GAAR will be put to good use challenging these schemes and it’s already happening. This along with real-time reporting by the intermediary (RTI) is like a red flag to a bull!
- We don’t like anything where you have to contract via an offshore entity. There has been legislation in force for more than 70 years which renders ineffective any arrangement where an individual transfers “asset” to someone else, based offshore, who receives income which the transferor has the power to enjoy. Case law has demonstrated unequivocally that if you provide services via an offshore intermediary, you are making an overseas transfer. As such these offshore schemes, including the ones used by some high-profile celebrities, were and are fatally flawed. You only have to read the press or follow news on social media.
- We don’t like uncertainty. It’s a fact of life that people like to know where they stand. It helps us sleep at night. A great deal of the more adventurous tax planning relies on taking a “leap of faith” – which may be fine when dealing with your own family trustees, co-directors or other closely related people. Most people are understandably (and rightly) more cautious when dealing with relative strangers. Worse still are those contracting “solutions” that can best be compared to black boxes – or perhaps black holes. Money goes in, money comes out (hopefully) – but nobody wants to tell you what happens inside the scheme itself. Not much help to you if HMRC ever asks you to explain how your contracting setup works, and why you chose that particular “solution”. Answering “no idea, but this one guaranteed 85% returns” probably won’t encourage HMRC to stop asking questions!
So why contract through an “Outsourced Employment Service” as opposed to your typical Umbrella Company set-up or contracting scheme.
- Your status as an employee is not in question. You will not lose sleep worrying about reporting or your tax being paid on time, and your agency or end client will have no concerns about being exposed to possible unexpected reporting and tax obligations.
- The employer is in the UK – nothing “offshore” is going on here.
- The employer ensures that all relevant PAYE and NIC reporting is carried out and take full responsibility for that – so no risk to you the contractor, nor to the agency or end client.
- Payments processed efficiently – usually the same day and always within one working day. All payments remain within the UK bank clearing system – no delays or currency exchange risks.
- Your terms of employment are clear and transparent.
Interesting times are ahead that’s for sure and with 2020 bringing in IR35 changes to the Private Sector there will be many intermediaries dangling carrots.. just be careful which ones you decide to take a bite out of!
For further information on IR35, aggressive schemes to avoid, contracting through and Umbrella or your Limited Company please contact one of the team at Tailored Services.
E: firstname.lastname@example.org T: 0207 118 2900 W: www.tailoredservices.co.uk