Engaging with a tax avoidance scheme could have devastating consequences
If you are looking for an umbrella company to take care of your payroll, you must choose a compliant provider, not a tax avoidance scheme. The opportunity to pay less tax may sound tempting, but the consequences could be devastating.
Unfortunately, there are hundreds of tax avoidance schemes posing as legitimate umbrella companies that target UK-based contractors and freelancers. It may seem tempting when faced with the option to take home more of your hard-earned money, but we strongly advise against engaging with a tax avoidance scheme as it could land you in serious trouble with HMRC, and you could end up facing a huge tax bill for unpaid tax.
Please keep reading to find out how to spot a tax avoidance scheme and what to do if you think you may be using one.
What is a tax avoidance scheme?
Tax avoidance schemes come in many forms, and it’s important to conduct thorough due diligence before registering with an umbrella company. Tax avoidance schemes (also referred to as disguised remuneration schemes) involve the umbrella company giving you all or part of your salary as a non-taxable payment to increase your take-home pay.
Examples of non-taxable payments include:
- Salary advance
- Non-taxable loan
- Grant
- Annuity
- Credit facility
- Bonus
- Shares
- Fiduciary receipts
- Capital payments
Often, the untaxed payment is paid to you by a third party or paid without explaining why it is un-taxable. These payments are no different from normal income. Therefore, income tax and National Insurance Contributions should be considered and paid on all income.
How to spot a tax avoidance scheme
The following examples are warning signs of tax avoidance schemes.
A short or brief employment contract or not being given a contract at all
If you receive a short contract with minimal detail, this could signify a tax avoidance scheme or non-compliance with other employment regulations. Also, be cautious of contracts that cannot be easily accessed, printed or saved. Always keep a copy of your employment contract for the future.
Umbrella companies offering higher take-home pay
Many non-compliant umbrella companies will advertise higher rates of take-home pay, such as 80% or higher. Always remember that the basic rate of income tax is 20%, and National Insurance Contributions are also due on all salaries. Therefore, an 80% take-home pay rate is most likely a tax avoidance scheme.
Unusual payment methods
Tax avoidance schemes often use unusual payment methods from separate entities or are made as different payments. For example, you may be paid one amount under PAYE (usually a national minimum wage amount), and the other part of your earnings will be paid as a loan or other non-taxable payment – often from a third party. These unusual payment methods may not appear on your payslip as they only show money paid through PAYE to make it appear compliant with HMRC. However, all payments should be paid together and shown on your payslip, and all taxes should be accounted for and paid to HMRC.
The umbrella company is based outside of the UK
Not all, but many, tax avoidance schemes are based offshore. Always check addresses used on the website, correspondence or contracts to determine where they are based. You can also find the details of companies and the directors on Companies House. If they do not appear in the search results, they may be based overseas, or the directors may not be UK residents.
The umbrella company has been allocated an SRN
An SRN is a number HMRC allocates to a tax avoidance scheme when they reasonably suspect it is notifiable or if it has been disclosed to them. It helps HMRC track scheme users.
Useful government resources
The government has released a list of current named tax avoidance schemes, promoters, enablers, and suppliers for you to look out for. Please bear in mind that if a tax avoidance scheme is not on the list, it does not mean that HMRC approves it or that it works. Always be diligent and on the lookout for the signs of a tax avoidance scheme!
The following guidance and resources about tax avoidance are also available on the government’s website:
- Spotlight 60 – information about tax avoidance arrangements used by some umbrella companies
- Spotlight 55 – information about what you should think about before using an umbrella company to make sure it follows tax rules
- Ten things a promoter of tax avoidance schemes will not always tell you – guidance and information about the risks of engaging with a tax avoidance scheme that a promoter will not tell you
- Guidance on what is meant by the term ‘contractor’ and information about employment status
- Information about how to identify schemes that wrongly claim to increase your take-home pay if you are an agency worker or contractor
What are the risks of using a tax avoidance scheme?
If HMRC finds out you are using or have used a tax avoidance scheme, you’ll have to pay the tax that is legally due, plus interest. You may also have to pay a penalty. Whilst you may not be discovered for a few months, maybe even years, the longer you leave it to settle any unpaid tax, the more you will pay when HMRC reclaims it.
What should you do if you think you are using a tax avoidance scheme?
If you think you might be using a tax avoidance scheme, please get in touch with HMRC as soon as possible. They will offer support and advice to help you escape the tax avoidance scheme and settle your tax affairs.
If you think you have previously used a tax avoidance scheme but are no longer using it, you still need to contact HMRC. By contacting HMRC to settle your tax affairs, you may be able to arrange a manageable payment plan, and it could also mean that you do not face a more significant tax liability if the scheme you used is taken to tribunal.
Contact Churchill Knight today!
Are you interested in moving away from your current provider and joining Churchill Knight Umbrella? Churchill Knight Umbrella is an FCSA-accredited and SafeRec-certified umbrella company providing contractors and freelancers with a compliant payroll service. Since we launched in 2016, we have quickly become one of the most popular umbrella companies in the UK, and we help thousands of contractors get paid each month.
If you are interested in finding out more about Churchill Knight Umbrella or would like to switch to our umbrella service, please call us on 01707 871622. You can also request a callback at a time that suits you, and a team member will contact you.
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