Understanding tax avoidance schemes
Posted on 13th February 2020
As a limited company director, you will have numerous responsibilities. Handling the issue of tax can take a significant amount of time and money. For this reason, it’s common for directors to explore tax planning opportunities.
Many of these planning opportunities provide legal ways to save on tax and are fully laid out by HMRC. Essentially, assuming you meet the necessary criteria, you will be able to reduce your tax bill. Particular elements of your expenditure can be written off assuming that you do qualify.
However, it is important to be cautious here. The wrong tax avoidance scheme could cause major problems for you and your company. That’s why you need to know how to spot a tax avoidance scheme and the penalties that you could face if you do choose poorly...
Tax avoidance schemes explained
A tax avoidance scheme is a way to increase your home pay. There are numerous schemes available from offshore loan schemes to trusts and even job boards. It’s important to note that there is a difference between tax avoidance and evasion. Evasion is illegal whereas avoidance is technically legal (it's not without its complications though, and there are many, many hoops to jump through!)
While the schemes are technically legal, HMRC are more aware of these schemes than ever and are seeking out contractors for unpaid levels of tax. For instance, due to the Loan Charge, tens of thousands of contractors now have to repay the tax they owe.
The loan scheme
It is important to be aware of whether a tax scheme is offshore. If you work and live in the UK, you will need to pay tax unless you match certain requirements.
One of the most common ways to use an offshore scheme is with a system of loans. Loans are provided instead of a salary and these loans can be made with foreign currency. The currencies then devalue and may be worth less than the previous contract.
This occurred with the Employee benefit loan trust system; contractors took minimum levels of wages and accepted the rest through a loan. This was not liable for the tax, however, using the scheme legitimately would mean that any recipient was liable for the loan after it was written off.
'90% take home pay' schemes
Often found by Googling, schemes providing you with the option to claim more than 90% of your take-home pay appear quite frequently on the internet. It is important to be aware that there is no way to achieve 90% take-home pay in a way where you remain compliant; with legal tax saving options, the most that you can hope for is between 82 and 85% of your take-home pay.
A similar scheme that you need to avoid is the promise a company makes of being ‘better than PAYE.’ It is possible that the take-home pay is higher than PAYE, however, this does not mean that the scheme is approved to HMRC standards.
Understanding the serial tax avoidance regime
Known as STAR, this piece of legislation was implemented by HMRC to control the level of tax avoidance schemes. The legislation imposes sanctions, as well as penalties on anyone found using tax avoidance schemes that are deemed to be non-compliant. Be aware that this does apply to any taxpayer that has ever used a avoidance scheme, rather than simply just repeat offenders!
There is both a warning period and reporting period for a director suspected of committing tax avoidance; the warning period is split into five years and you will be provided with a notice within 90 days that you have been issued with a STAR. During the reporting period, you will be required to provide key information including how much tax you avoided.
Does a scheme reference number mean a scheme is approved?
You will find certain companies that claim that they have a 'scheme reference number' issued by HMRC. They will suggest that this means that the scheme is compliant and safe to use. However, this is not the case. HMRC does not provide blanket approval for any type of scheme; compliance depends entirely on how the scheme is used and under what circumstances it is put into action.
It is also worth pointing out that ignorance of the tax system will not be accepted as an excuse for tax avoidance. Instead, an individual is held accountable for their own tax affairs and completing the right process.
If you are worried about tax avoidance schemes or you simply need help figuring out the best way for you to pay tax, why not give us a call or drop us an email? We’ll be more than happy to help advise you, taking your individual circumstances into consideration. We’ll explain your options in simple, understandable terms, and help you come to an informed decision based on your specific situation.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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