With all of the recent legislative changes and the impending IR35 changes within the public sector, there has been an increase in "enhanced take home pay" umbrella models. We frequently get asked whether some models are legitimate. Most of the time you know the answer before you ask the question. If it sounds too good to be true then it usually is!
Such schemes are often marketed as wealth management products or dressed up as exciting investment opportunities or loan schemes. The nature of the schemes and arrangements may be different, and on first glance some products may appear to be genuine. However, they all try to reduce the amount of tax and National Insurance contributions due through contrived or artificial transactions that serve little or no commercial purpose other than to produce a tax advantage.
A good example highlighted by HMRC this month is where the contractor becomes an employee of an umbrella company and is then paid in two parts. Firstly there is a small basic wage with little or no tax and NICs deducted. The balance of the income is used to advertise the contractor's services on a jobs board. They then receive loyalty points in return for keeping their details on the job board. The loyalty points can be cashed in by the employees shortly afterwards, with no deductions made for tax or NICs. HMRC are very clear that this and similar schemes don't work, and the contractors may end up with an even larger tax bill for their troubles!
So beware! Promoters marketing these avoidance schemes and arrangements often use a variety of terms or statements to reassure their clients, examples include:
- these arrangements fall outside the scope of tax avoidance
- the scheme is not disclosable to HMRC
- leading Tax Counsel (QC) have approved the scheme
- the scheme has been disclosed and therefore you cannot be penalised
- we have been offering these schemes for years and have not been challenged
- you can receive tax-free payments that are compliant with tax law
- we have won all previous court cases in relation to these arrangements
- ·HMRC will write you a few letters and then give up and go away
- you're fully insured against any challenge
- HMRC has approved the scheme - they've given it a reference number.
HMRC never approves avoidance schemes. Assertions that HMRC has never challenged schemes of a particular type, or claims that a scheme produces tax free payments that are compliant with tax law, are often incorrect.
Saying "the scheme has been disclosed and therefore you can't be penalised" doesn't mean that you won't have to pay the disputed tax, interest and possibly penalties. Similarly, saying "leading Tax Counsel have advised that the arrangements are legal and work" does not necessarily mean the scheme works.
Counsel may be advising the promoter on the basis of assumptions which may not turn out to be correct when the scheme is implemented. And whilst Counsel may have advised that the scheme works, their advice is only one opinion. HMRC has a strong track record on avoidance and wins around 80% of all avoidance cases taken to court.
Some promoters claim that any tax, interest, penalties, fees and other costs are fully insured so, if you lose a dispute with HMRC and have to pay the tax, you won’t be out of pocket.
We have seen instances where these claims are misleading. Often, they are made alongside a claim that the scheme is fully compliant with tax law, or strongly backed by Counsel's opinion, which may make you wonder why insurance against failure is needed in the first place.
Some people who entered into tax avoidance schemes have ended up paying far more tax than they would have if they had not entered the scheme in the first place. And many are now getting out of tax avoidance and putting the past behind them.
Remember, avoidance schemes are complex and they can give rise to unintended additional tax consequences. To ensure that you remain on the right side of HMRC and are not left exposed to any tax liabilities it’s important to partner and work with approved and complaint providers such as PayStream.