Perhaps not so well publicised has been HMRC’s focus on identifying and investigating those contractors who have been using such schemes in previous tax years. A recent HMRC announcement indicates that they are now focussing resource on countering this form of tax avoidance which they refer to as 'contractor loan schemes'. (HMRC gives settlement chance to contractor loan schemes - July 14, Shout99)
Specialist contractor service providers, Brookson takes a look at the relevance of this sort of scheme to contractors.......
The attraction to the contractor in using an offshore payment intermediary is easy to understand, take home pay of 90-95 per cent of contract value is often published on the provider's web site.
However, the old adage of 'if something is too good to be true it probably is' is something that is often referenced when advising contractors on whether this is a viable option.
HMRC have been facing an uphill battle to combat this form of tax avoidance (from which they calculate £430 million of tax is owed) where typically a low salary is paid to the contractor which is topped up by a loan which is not subject to tax.
The employment provider is typically based offshore in a tax haven and therefore outside the scope of UK tax or in some cases any form of tax. In some cases the provider may be based in the UK but use a convoluted structure involving offshore trusts to try to conceal the true picture. This has made it hard for HMRC to investigate the offshore employment provider and resource constraints has made it hard for them to target individual contractors.
The recent announcement from HMRC implies that they are now have details of contractors who have used these schemes from 2008 to 2011 and are taking action to recover unpaid tax.
HMRC are writing to over 16,000 contractors (who they believe owe on average £11,000 a year in tax) with an assessment of the tax they believe is due and giving them an opportunity to pay this tax or challenge the assessment via a tribunal and risk the possibility of further penalties.
From April 2014 going forward HMRC will now go to the recruitment agency who placed the contractor to recover unpaid taxes.
It is clear that HMRC are no longer tolerating this form of tax avoidance and are taking direct action to counter it, as they have also done recently with the onshore self-employment intermediaries legislation.
Compliance should remain a key factor for contractors and recruitment businesses alike when selecting a provider to manage their contractor payroll.
Hopefully this type of compliance action will result in non-compliant businesses falling by the wayside, however, many are still trading and selling their services to uninformed contractors and recruiters who may be oblivious to the financial implications.
Appropriate due diligence is now essential throughout the supply chain.
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Susie Hughes © Shout99 2014