Some contractors that are employed through agencies and umbrella companies are signing up to arrangements that claim to maximise their take-home pay and retain up to 90% of their income after tax and NI. But these are effectively tax avoidance schemes. It’s important to do your research and ensure the provider you use is compliant, but with so many payroll services available, how do you know who is compliant?
HMRC has issued advice to taxpayers on how to spot and avoid tax avoidance schemes, including offshore intermediaries.
What is an offshore intermediary?
An offshore intermediary is a company that is located outside of the United Kingdom (UK) with the sole intention of maximising workers take-home pay by helping them avoid tax and National Insurance Contributions (NICs). The companies that offer these arrangements will claim that the payment options are non-taxable because people who use these schemes will be sent their salaries by credit, loans or something similar. However these payments are actually no different to normal income, and therefore tax and NI contributions apply.
There are many different offshore intermediaries available and below are a few examples of the most common types:
- Loan Schemes – the worker receives a loan on top of a minimum 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 points can then be exchanged for tax-free cash.
- Pension Schemes – the worker sends some of their salary offshore as part of a pension pot and then collects the full amount at a later date – tax-free.
The larger payments may come from a different bank account than the first smaller payment and could come from an account that is overseas, although this is not always the case. The larger payments will be shown separately to the smaller payments on a payslip and will be referred to as something other than pay. Therefore, the contractor is receiving the rest of their salary without paying NICs or tax, which in the eyes of HMRC is tax avoidance.
Why offshore intermediaries are not compliant
Non-compliant PAYE and umbrella company schemes, especially offshore intermediaries, claim to offer guaranteed take home projections of up to 90% of your wage if you use their service, but this is simply not possible through PAYE. If your payroll arrangement is an umbrella company or agency PAYE, the basic rate of Income Tax is 20% and National Insurance contributions are also due on all earnings. Consequently, everybody who works for an HMRC-abiding umbrella should expect to retain around 65-70% of their earnings, after the required deductions have been made.
The penalties for using these schemes
HMRC will always challenge tax avoidance schemes and wins more than 8 out of 10 avoidance cases heard in court. If HMRC believes you have been using a tax avoidance scheme, you may be required to pay all of the money they believe you owe, as well as an undefined fine.
HMRC will work to shut down non-compliant schemes, and has the ability to fine contractors and providers of these schemes dating back to 1987. Ultimately, you are responsible for your own tax affairs and choosing which payroll provider to use, but please be aware that tax avoidance schemes which claim you pay less tax are extremely high risk and we strongly advise you against using one.
What should you do if you’re involved in a tax avoidance scheme?
HMRC is unable to tell you whether an agency or company is promoting a legitimate arrangement or not and therefore, you should seek independent professional advice if you are unsure.
If you are currently using a tax avoidance scheme, or have used one in the past, you should withdraw from it immediately and report it to HMRC. You also have the option to settle your tax affairs with HMRC to avoid further penalties and interest charges being incurred.
HMRC’s website has plenty of information on tax avoidance schemes and the implications of using them. Visit Churchill Knight & Associates Ltd or Bluebird Accountancy’s blog to find out more about how these schemes could affect you specifically.
The importance of using a trustworthy and complaint accountancy and payroll provider
As a contractor, it is vital that you use an HMRC-complaint accountant to ensure you pay the correct Income Tax and NICs. There are a number of UK-based industry bodies that regulate contractor accountants and umbrella companies. Industry bodies such as Professional Passport and APSCo ensure the service you receive meets the regulatory standards.
Follow the guidelines below when choosing a contractor accountant or payroll provider:
- They have a good reputation within the industry and are owned by professionals with plenty of experience.
- They offer realistic take-home pay.
- They are industry experts and can provide you with important information about how to legally comply with UK tax laws.
- They have a 100% compliance record with HMRC and have not been assigned a Scheme Reference Number (SRN).
- They do not try and convince you to claim excessive expenses.
- All of their activities take place in the UK.
- They work with other companies in the industry who have a positive reputation, such as insurance providers and advisors.
- They have written content on their blog articles and website which clearly explain the risks of tax avoidance.
Churchill Knight Umbrella
Churchill Knight Umbrella is Professional Passport accredited and is on the APSCo list of affiliated providers. Churchill Knight Umbrella is a fully HMRC compliant payroll provider, so you can count on our expert team to support you through your contract work.
To discuss joining our umbrella company, or if you are looking to switch providers, please call 01707 871622 or request a call back to discuss your options. We’ll help you learn to spot non-compliant schemes and help you choose the right payroll option for you.
Churchill Knight Umbrella operates in full compliance with HMRC legislation and offers all of the benefits listed above. Please contact us to find out more information.