If you are contacted by a company offering unusually high levels of take home pay, the likelihood is it’s a tax avoidance scheme. There are hundreds of such schemes in existence, making use of tax loopholes and marketing their services to contractors.
Many will promise retention rates of over 80%, which obviously compares favourably to any percentage you would get from using a standard limited or Umbrella Company.
What the scheme providers will not mention is the risks involved in using them. Tax avoidance is at the very top of HMRC’s to do list. The fact is that users of these schemes will pay a miniscule amount of tax, and this isn’t something HMRC take kindly to.
Many schemes operate using ‘Employee Benefit Trusts’, where they loan the money to the contractor tax free with no requirement to ever repay the loan.
Because the contractor is an employee of the scheme, the promoters will often focus on the fact that the scheme is protected from IR35 (which only applies if you use your own limited company). They will also proudly state that they have been ‘approved by a leading tax barrister’ or similar. This conveniently disguises the fact that there is a much bigger risk.
Thousands of contractors have received retrospective demands from HMRC for the tax they should have paid whilst using these schemes. The demands generally run into tens of thousands of pounds – often more. On receipt of a demand it is not uncommon for the contractor to turn to the original scheme provider for advice, only to find that they no longer exist.
Most tax enquiry insurance policies exclude cover for enquiries involving avoidance schemes, so regardless of the ultimate decision any defence or appeal costs would need to be funded.
One of the problems with these schemes is that they never divulge how they actually work; so it’s sometimes difficult to tell that it actually is an avoidance scheme. However, if you see a financial illustration that looks too good to be true it probably is just that.
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