Contractors who used Employee Beneficiary Trusts are in HMRC's sights The British Government closed a window of opportunity for tax-efficient folk about a year ago that was beneficial to, and widely used by, contractors: the Employee Beneficiary Trust. Only now, though, has HMRC begun chasing those who had employed this shelter. A demand for money on income generated five years ago dropped …
I know someone who is in this situation. He has letters from HMRC from around the time he did it confirming it was an approved scheme (or some such wording).
AFAIK this is a clear case of HMRC trying to move the goalposts after the fact, and is functionally no different from an employee avoiding tax using a pension for example.
And yes - its the same HMRC that screws over the little guy whilst making crafty backroom deals with the FTSE 100.
I have met other government departments that change the goalposts. Their motto is: I am alering the deal. Pray I don't alter it any futher
The goalposts have not moved.
An interest free loan is still a loan. It is a debt that you have to finance, and one that you would expect the creditor to still be keen to get back.
When it becomes obvious that none of the normal considerations for debt management have been met by either party, then HMRC can quite legitimately call into question the validity of the contract.
Remember, a contract has to have consideration on both sides, otherwise it's a gift, and thus taxable as such.
If only the grubby, thieving bastards had shown some repayment consideration or at least remembered to mention they still had this debt in subsequent tax returns.
I wonder how many people died through a lack of state financing for the NHS, during this scam?
Sorry to hear that cloud cuckoo land has renewed your passport Gordon 10, but I do believe the current system whereby people are queued up to await life extending treatment, because there isn't enough money to save them all, is still in operation.
Obviously, the more money the exchequer has to throw around, the more these critical services can expand, and maybe, one day, never again will people needlessly die on a waiting list.
Of course, that relies on many factors, one being, people pay their rightful contribution to society, but as we all know, greedy twonks (sorry I had to use that term as it is so not, twatish) just don't know when to stop feeding.
Yeah, right.
You've do realise that HMG urgently needs another £<hellofalot> to feed the essential work being done to get the new universal credit system completed on time and to budget, don't you?
I mean .... contractors .... I mean kittens may die etc etc ....
Being serious ....
I'm not a contractor - never have been one - and I'm almost totally ignorant of "tax avoidance schemes"
My problem is not that this is construed by some / all as a dodgy scheme, rather that it seems to have been proscribed only recently. Ok - if anyone is trying it now they deserve to get hammered but if they were only doing what was considered ** at the time ** acceptable and legal it seems doubly dodgy to me if HMRC are looking back before the "kill" date. Retrospective legislation and all that.
Ok - I'm self employed. That means that I can set against tax a set of defined expenses. (Materials, travel, office costs, professional fees, capital allowances etc). Now these things do change a bit from year to year. As long as I get it right each year I quite reasonably assume I'm ok.
Should HMG decide to disallow any of these, should HMRC be able to go back x years and claim unpaid tax?
What about eg mortgage interest or pensions relief?
Or perhaps I'm totally misunderstanding the article.
You are understanding correctly.
It's about moving the goalposts AFTER the game, and removing any sort of certainty in law.
The fact that they are targeting contractors is only for "divide and rule" purposes.
And judging from the responses to the article (99% of them being knee-jerk "good on you" reactions that completely misunderstand the situation), it is working wonderfully.
See hmrc-apn.info to learn more about this scandal of a legislation (don't worry, this site has nothing to sell you)
"Should HMG decide to disallow any of these, should HMRC be able to go back x years and claim unpaid tax?"
It is somewhat the cost of doing business, tax systems work like this - I don't know if they should or not but they do. Just be happy you live in a country where you can't be jailed for it; directly.
Also by the way the rules on retrospection only apply in criminal law.
I wonder how many people died through a lack of state financing for the NHS, during this scam?
Given that the state had plenty of money to keep financing Trident, not to mention fighting several counterproductive wars (at least one of which was illegal): None.
I wonder how many people in the middle east have been killed as a result of people voting labour.
Roughly zero pretty much any way you look at it? I don't see either John Major or Hague responding any different to 9/11 nor Hussain's nonsense down the road of that's your argument.
Not for nothing but back on topic nothing about being a contractor (and self-employed) is intended to stop people paying their fair share of tax or to make it easier to avoid or evade tax. Yes it's riskier, but nothing about the tax system is there to reduce that risk: everybody is under some risk of not working next week; it's the decision you make.
Can your friend prove that HMRC had full and accurate details of the arrangement which they'll probably deny.
HMRC have an unlimited supply of brass neck. IIRC iIn the LimeIT case the investigator wrote a 2 page apology to the tribunal admitting he handled the case wrongly but still insisted that he was right.
Loans are designed to be repaid. The fact of non-repayment can only be established over time. We can hardly blame the revenue for not realising that there was no intent to repay. I'm pretty sure that no-one explicitly stated that the loan would never be repaid when getting the scheme signed off by the revenue. Similarly it would only be after a number of tax returns showing no repayments that the HMRC could justifiably become concerned.
"We can hardly blame the revenue for not realising that there was no intent to repay."
Quite so, and indeed that was my point. HMRC have no crystal balls, and not that many lawyers either.
Consequently, when many years later it becomes abundantly clear that in many similar cases there's been no significant loan repayment, and quite likely never would be, we can hardly blame HMRC (on behalf of honest taxpayers across the UK) for wanting their pound of borrowed flesh back, can we.
And those supporters/users of these schemes, saying "HMRC isn't playing fair", don't have a credible leg to stand on, not that the supporters seem to understand what "fair" is supposed to mean anyway.
Right?
"They were notified via the DOTAS rules with a SRN number declared on tax returns. See 2004 finance act."
So what. The existence of an SRN is not evidence that the scheme's legit, it's just a Scheme Reference Number for one of a huge number of generic schemes in the marketplace, so that HMRC and taxpayer both have a common understanding of the scheme details. Don't take my word for it, IANAL.
Are the Law Society likely to be definitive on this subject? Here's what they say (my bold):
"5 Scheme reference numbers
The scheme reference number (SRN) system is a means of identifying the users of disclosed schemes, allowing HMRC to prioritise and co-ordinate enquiries into users' returns.
The allocation or notification of a scheme reference number does not indicate that HMRC accept that the scheme achieves or is capable of achieving any purported tax advantage."
http://www.lawsociety.org.uk/support-services/advice/practice-notes/disclosure-tax-avoidance/ (11 May 2011)
That's not me, that's the Law Society. You want to disagree with them, best of luck.
As legalese goes, that's pretty clear: existence of SRN does not imply scheme is legit.
The only bit missing from that Law Society line is a black and white instruction to make contingency plans in case HMRC later decide the scheme isn't legit, or take a particularly long time deciding it is legit. Which is just common sense, assuming you're aware that SRN does not mean scheme is legit,
Those of you here that are telling the rest of us that SRN implies legitimacy appear to have been misinformed. You might want to have a quiet word with your financial or legal adviser and if required maybe make a complaint to the appropriate regulatory body. Good luck with that. And in turn your adviser may want to send the boys round to have a quiet word with the people who were promoting the scheme in question, who were presumably expecting their cut somewhere along the way.
Meantime, you've had a learning experience. Best of luck sorting it out.
Fwiw it took me all of twenty minutes or so to find this info just now, so if I've misunderstood, correction is welcome.
If however *you've* misunderstood, and stand to be seriously out of pocket as a result, then what else can I say.
Completely agree.
As someone (one of many) who worked alongside 'contractors' in the 80s exploiting umpteen tax loopholes to avoid paying their fair share of tax on the vastly higher salaries than those employees they worked alongside, I have no sympathy whatsoever if belatedly HMRC are catching up with such schemes; even if, sadly, those I saw abusing the system aren't likely those now getting hit.
Schemes used were disclosed under the DOTAS rules (http://www.legislation.gov.uk/ukpga/2004/12/part/7)
Why didn't you become a contractor? It's your choice whether or not to go down that route. I don't see why winging about people earning more than you helps when it's a free choice for anyone as to how they work and get paid for it.
@Simon Watson, it's hard to have sympathy with people who don't have a guaranteed job and who ask high amounts to cover the times when they are looking for the next contact isn't it. Employees know that their job is relatively safe and even if they loose their job they have certain rights like redundancy and notice periods. Contractors have none of that and that's why businesses pay high rates - because they know they can get rid of them at the drop of a hat.
As for paying tax, the rule is pay as little as possible. All paying tax does is allow the state to get big and fat and it'll keep on asking for more and more. Keep the state small and lean.
What's a fair share anyway? 10% or 90%?
PS. You do know that if you're not happy with the level of tax you're paying that you can send extra amounts direct to the Tresasury. I'm sure that you'd be happy to do so otherwise I could accuse you of not paying your fair share of tax.
@TheAxe - How many logical fallacies can you get in one rant? Fair play to you! To pop just one of your points, no-one here (at the time I'm writing this, anyway) was having a go at how much contractors earn. They're having a go at how some of them have used clearly dubious schemes to avoid tax. No-one can seriously look at the scheme as described in this article and think "hmm yes, that sounds all above board, I'll have me some of that". At best they were thinking "Wahay, looks like I may be able to get away with this after all, and screw the rest of you".
By the way, I'm a former contractor - I get the reasons why contractors are paid more and I'm all for fairly and legally arranging your finances so as to minimize your tax burden. This scheme however was clearly a scam waiting to be found out.
@Ian7 - They're having a go at how some of them have used clearly dubious schemes to avoid tax.
Exactly. The lesson is, if you are ever sitting in a meeting with your accountant and he mentions Gibraltar, the Isle of Man or any of those other haven-y places - it's time to get a new accountant.
the tax system is too complicated, higher tax brackets don't work, high corporation tax, does not work.
Right now high earners try to avoid tax and live in less expensive tax regimes to save money.
Make it a flat rate, and there suddenly is less of an urgency to avoid tax...
Gov saves money by less avoidance to catch, you gain tax receipts by less people avoiding paying tax.
Around 20% direct income tax is about right, with 20% VAT, meaning roughly 30% tax overall. (34% if there was no personal allowance and no zero VAT rated goods)
oh and abolish NI.
@TheAxe
Contractors do have a guaranteed job, they are employed by their own company. And it's very clear from the operation of these EBTs that the contractor was an employee of the foreign based company.
What Contractors might be lacking is fee earning opportunities, that's why they charge the rates they do, to cover the slack and provide the pension as well as salary. So if the Contractor can't structure their business to cover the lean times and insist on stripping every penny and cent from the company while evading tax then that's just bad business and bad financial management. Stripping money from the company, even one you own, potentially leaving it unable to meet its financial obligations is fraud. Try getting your next contract with that conviction behind you.
"... who don't have a guaranteed job " by choice.
I was a consultant programmer for years, and very happy I was, not because of the money - which wasn't outrageously great in them days - but for the sheer pride at holding a job because I could do it and would be shown the door the instant I couldn't.
But the fact that the money was much better than the salaried types were getting, benefits and all, didn't hurt. Nosir, it didn't hurt at all.
And the motto with taxes is "pay as little as you can but don't whine when the bills come due". This Gibraltar scheme is a re-tread of the old Seychelles scheme which is a retread of the ... well, you get the picture. The fiction is an obvious falsehood erected to avoid paying your fair share.
Every tax pound *you* "avoided" was added to someone else's bill, usually in the form of additional taxation.
So Mr F. Ewe, pay your taxes.
"Contractors have none of that and that's why businesses pay high rates - because they know they can get rid of them at the drop of a hat"
And they have to pay tax on those earnings. Many contractors do at the standard rates. I don't know enough about the specific scheme to be able to comment directly on it but given the HMRC think they're getting money it's fair to assume they think it was obviously bullshit.
Also the HMRC doing idiotic - nay, arguably criminally corrupt - deals with the likes of Voda and many others doesn't negate your requirement to pay tax on your earnings (and yes it sucks). If everybody paid their fair share (i.e. what most other people pay) then no doubt the tax rates could come down generally; rather than the bullshit situation we've dug ourselves into.
Of course you should pay your taxes - you think moats clean themselves? You think duck houses grow on trees? You think the home secretary gets their porn for nothing? You think smug pompous midgets work for free?
Woudn't it just be easier for all to abolish IR35 and let contractors just be contractors. IR35 has caused all this mess in the first place. PAYE is not appropriate for many in IT as their contracts are not a full year. It was only brought in because of a spiteful government taking aim at workers whose contracts are not from the dinosaur ages like their union paymasters.
Just remove IR35, and all will be well (or better anyway).
Some years ago for every genuine contractor there must have been dozens who in reality were indistinguishable from employees, an abuse which is why IR35 came about. In recent years we've had "contractors" forced to divide their time between different employers in an attempt to show that they were independent, simply to get around IR35. EBTs are a particularly glaring example of other schemes that are at the "evasion" end of the scale, but all these tax avoidance shennigans were a disaster waiting to happen. And if you don't have the clout of an M&S or Amazon, choosing to fight HMRC is brave indeed.
" in reality were indistinguishable from employees"
at first glance indistinguishable from employees of the engaging company but in reality had no employee rights from that engager and had to make their own equivalent arrangements
FTFY
It's really amazing how many permies thought that but somehow never took the freelance path themselves.
The point is that these weren't genuine freelance contractors - they worked for the same company for years on end in many cases, and could have become permanent employees if they'd wanted to. The only reason for the arrangement was to minimise their tax, which they clearly thought was worth more than any employment benefits they had to forgo.
No holiday pay, no sick pay, no pension, no redundancy pay, 1 week notice period or zero notice period if they don't renew when you're led to believe they will. Just how is that permanent employment?
Should we tell clients not to renew us when we do a good job? Clients value flexibility and pay more for it, that's the reason for the arrangement.
"No holiday pay, no sick pay, no pension, no redundancy pay, 1 week notice period or zero notice period if they don't renew when you're led to believe they will."
So a lot like an employee on a short-hours contract then? The currently popular one is zero hours but you can work quite a few hours a week before employment rights start to apply.
There is a damn sight more difference between a real contractor and an employee...
Not only the pay, but the control...
as a contractor I can say NO to my client at any time (within reason of course or I'd never get work)
I use my own equipment, I can do the task how I think it should be done, I can work in my own office most of the time (a definite requirement for any contracts longer than 3 months!)
I can take time off when I want, no need to get approval, although its polite to ensure it doesn't affect the client, and I try to manage my holidays to slip between contracts.
IR35 has caused all this mess in the first place
NO.
IR35 was HMRC's first attempt at dealing with unscrupulous IT contractors who thought in the 90s that it was a cool idea to pay themselves such a small salary as to only pay a token amount of National Insurance, no PAYE at all, and then pretend that the rest of their income was 'expenses' being reimbursed.
Although a lot of contractors at the time were genuine small businesses operating above board, the number of pretenders who were taking the piss got ridiculous and eventually the HMRC had to do something.
YES.
You'd be astonished at the number of contractors that moved from Ltd companies to various contractor structure (the one described in the article being but one example) to find some certainty away from the uncertainty that IR35 introduced.
And often, this move was done ON THE RECOMMENDATION OF THEIR OWN ACCOUNTANT!
Despite what people think, these "structures" generally didn't offer much of a "tax advantage" compared to a well managed Ltd with pension contributions. What they did offer was less admin, and SAFETY FROM IR35.
sorry but i had a bit of a grin during that, I don't get a choice about paying my taxes and it's a good 25% of my pay, so don't expect me to shed a tear because you were made to do your share too
I notice this is credited to "Team Register", because I'd looked to see just who I'd lost a lot of respect for
Taxes for contractors aren't actually as generous as many believe.
Corp tax is 20% ish, depending on the year. Out of this are taken expenses. For a services contractor, expenses are fairly low, and there is a special VAT scheme that recognises this.
This applies in all cases, unless there's some evasion scheme or other.
To actually get the money from the company to your pocket there's a few methods. You could pay a salary, and pay paye. You then pay paye taxes, between 10 to 40%. Alongside that, there's national insurance, both employee and employer.
Both PAYE and NI are blocked as expenses against the Corp tax liability and act to reduce it.
You'll end up with an effective rate of around 35-45% on all money received by the contractors company if you do this. This is high.
The alternate method, you pay dividend to the owner of the company. This is taxed at 10%. You then declare this income, along with a small salary and pay personal taxes on it.
These are similar in rate to PAYE.
The big tax missing from this system is employer side NI. So you gain around 12%.
You'll end up with an effective tax rate, over everything, of between 25-35%.
This is one of the reasons employers like contractors, the removal of employer NI. They can just pay it directly to the contractor, through a really simple invoicing system.
If you sign up to IR35, expenses are removed and employer side NI are added, and you end up paying more than the average employee, due to the employee never seeing employer side NI or realising it's there (it's added on top of your salary).
Contracting can be a good life, I recommend it. The vast majority of contractors arrange things the way I describe.
Tax is necessary to sustain our civilisation, however I don't like the jump to declare it a 'moral' thing to do.
Plus the government will probably up dividend tax rates again in the next budget. In a few years' time I doubt there will be a much tax advantage in being a contractor with a Ltd Company.
Plus for those of you married, the spouse being able to draw dividends is a huge tax advantage that I hope will be closed.
1. Author uses bloody obvious Tax evasion scheme, which basically takes a cut of the money it saves him paying the government in tax.
2. Author gets chased down by HMRC
3. Author pays Tax that he was supposed to pay in the first place, plus interest.
4. Author writes article about nasty, mean old HMRC....
Replace the word "Contractor" with "Banker", ""MP", "CEO" or any high-earning celebrity and there would be a parade to support the actions of the HMRC....
You seem to have overlooked a couple of points:
1. The schemes in many cases were OK'd by HMRC at the time.
2. HMRC are going 5 years and more back to go after these people. Personally I don't think this should be allowed, for contractors or individuals, it's ridiculous.
3. Whatever we may think of these schemes it seems they were legal at the time but HMRC have the table slanted in their favour to make it hard for the small man to get justice in the legal sense.
4. I'd have a lot more time for HMRC doing this kind of thing if the rules were applied to large firms like Voda and if they went after Amazon, Starbucks and Google etc. Getting money from contractors is a drop in the ocean compared to what they should be getting from these large corporations.
I should point out that I'm an employee and while I have contracted in the past I've never used a scheme like this, or in fact any scheme.
"The offshore company would provide the rest of the outstanding money (contract value) to the contractor as an interest-free loan."
How was that ever considered legal by anyone? Surely an interest free loan is a benefit in kind, and therefore should be taxable (i.e. you should pay income tax on whatever the interest should have been at market rates).
Seriously, the whole things sounds pretty dodgy so you must have had the thought in the back of your mind that it might come back and bite you at some point in the future.
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