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How contractors can stay wary of tax avoidance schemes
- 05 Apr 2023
At the most basic level, if something looks too good to be true, it probably is. Yet, when it comes to tax avoidance schemes, it’s not always straightforward to identify them.
These schemes are often elaborate arrangements that can leave unsuspecting contractors vulnerable to significant tax liabilities.
IPSE has consistently called for the unscrupulous promoters of tax avoidance schemes to face tougher punishments and we were pleased that the Chancellor launched a consultation on plans to imprison promoters of tax avoidance schemes at the Spring Budget.
We also recently met with HMRC’s Counter-Avoidance team to discuss the latest tactics used by unscrupulous promoters and how we can best support our members in avoiding such schemes.
It goes without saying that is still vitally important as a contractor to stay vigilant to these schemes and especially now that contractors are more likely to be operating via an umbrella company since the introduction of the IR35 reforms in the private sector.
We’ve heard from HMRC that they are increasingly seeing umbrella arrangements used as part of tax avoidance schemes and that’s why we’ve put together some of the key warning signs to watch out for and what you can do to stay clear.
Here are eight common aspects of a tax avoidance scheme that contractors should watch out for:
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1) Any scheme that allows you to keep more of your income than you would expect, with little or no deductions for Income Tax and National Insurance contributions (NICs) |
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2) Some, or all of the payments you get are said to be “non-taxable”. These could be described as loans, annuities, bonuses, or shares. These payments are no different to normal income and you still need to pay Income Tax and NICs on them. (This does not include allowance thresholds e.g., dividends allowance of £1,000) |
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3) Schemes you are told are safe and compliant or approved by HMRC. This is not true - HMRC never approves avoidance schemes |
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4) Only a part of the total payments you receive may be taxed as income. If you are employed, this is usually a national minimum wage amount |
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5) Being offered a choice between a standard or “enhanced” pay scheme. The enhanced version is likely to be tax avoidance |
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6) Being asked to sign more than one contract or agreement |
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7) An employment contract or agreement that does not state how your income will be paid, or provide you with a breakdown of all your deductions |
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8) Being offered a ‘cash bonus’ if you recommend the scheme to a friend |
If you do suspect that you have been caught up in a tax avoidance scheme, there are steps you can take and you can find more information here.
At IPSE, we recognise the unique vulnerability faced by contractors when choosing between umbrella companies and deciding whether to take the advice of an accountant. We continue to meet with the Labour Market Enforcement team to raise the issue of umbrella company regulation and we do have our own plans for supporting contractors when choosing between suppliers that we hope to announce later this year.
For more support and advice on tax avoidance schemes, IPSE members can make use of our tax and legal helplines or you can also contact [email protected].
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