Legislation over the last 24 months has changed to tighten up on any tax-avoidance loopholes to varying degrees. This is evident in areas relating to Supervision, Direction and Control (SDC), VAT Flat Rate Scheme for limited cost and service companies, employment allowance for 1-man Limited Companies, public sector IR35 measures, and companies issuing ‘loans’ that are never repaid.
It is therefore not surprising to see a host of new (and arguably creative) offerings surface, promising high returns that are seemingly unlikely if not impossible to achieve without being contrived.
If it sounds too good to be true, it probably is. We want to make you aware of such schemes and the risks involved in engaging providers of such schemes so that you are better placed to make more informed decisions.
Employee Benefit Trust (EBT)
This is classed as "disguised remuneration" and occurs where an employer pays a contribution onto a third party (EBT) instead of paying the employee directly.
The EBT then provides the funds to the employee in the form of loan. These loans are generally interest free, and are signed under terms that meant that they would not be repaid in the employee's lifetime.
Alternatives to a loan could be that the funds would be invested by the third party, to be provided to the employee at a later stage.
Both are intended to avoid payment of Income tax and National Insurance.
The disguised remuneration legislation was introduced in the Finance Act 2011. Since then, there have been several incarnations of the above including Employer
Financed Retirement Benefit Schemes (EFRBS) which claims that workers are not solely employees.
HMRC is tackling those that have not taken the settlement opportunity by investigating tax returns and seeking full settlement of tax due, plus interest and penalties where appropriate.
Details can be found here and here.
Employment Allowance (EA)
The Employment Allowance (EA) entitles employers to save up to £3,000 in employer's National Insurance per year and is designed to help alleviate the costs incurred on payroll and administration for small businesses. This was never intended for Personal Service Companies and as such the law was refined to exclude companies with only 1 owner/employee.
Since then, certain schemes are being marketed that exploit this by ‘combining’ 2 or more limited company contractors to operate via a single limited company. This tactic has also been used by umbrella company providers.
This pitch has even been extended to the recruitment agency themselves, whereby the agency opens up multiple sub-agencies, each employing 2 or 3 recruitment consultants.
HMRC has strongly advised against this, with the risk of liability for underpaid NI, in addition to litigation costs, at stake. You can view the HMRC guidance here.
A case in point: two years ago a company providing such a scheme was brought to light in a BBC recorded meeting, which you can listen to here.
This type of arrangement is unlikely to be branded an ‘umbrella company’, but could be called a PAYE solution, or indeed an entirely new name.
An annuity is a type of investment where a person pays a lump sum, usually to a pension company, in return for guaranteed income. Private annuities, such as those used in this scheme are very rare.
The premise of this scheme is that an employee is paid a salary (kept to a minimum to attract little or no tax) and the second part as a non-taxable capital payment for a deferred annuity.
HMRC have been clear when stating that schemes involving annuities are within the scope of the proposed new loan charge, which will apply to all outstanding disguised remuneration loans on 5th April 2019. They have also stated that they will investigate all tax affairs, and that unless the capital sum for the deferred annuity is paid back in full by April 2019, or settled with HMRC, the new loan charge will apply to the outstanding sum.
More on the Loan Charge here.
This could be marketed as an umbrella company, whereby the employee, as the annuity example above, is paid in two parts. The first part is a salary (kept to a minimum to attract little or no tax) and the second part is used to advertise the contractor’s services via a job board. They receive loyalty points for retaining their details on the job board, which can be cashed in by the employees shortly thereafter with no deductions for tax or NI. The employee usually would pay a large margin for using this scheme.
HMRC is, again, very clear when they state receiving and redeeming loyalty points is taxable income, which forms part of the contractor’s employment income.
Both the contractor and any businesses involved in this type of scheme may be found liable for all unpaid taxes.
You can find more information on this here.
As with anything, should you wish to discuss the above, or any new offerings / solutions offered to you, we encourage you to get in touch with your Account Manager. We deliver honest opinions, evidenced by legislation and legal advice; and promote sustainable solutions that benefit all parties.