Spotting the Signs of Tax Avoidance

With IR35 reforms only a few months away, more and more Umbrella companies are emerging, some of which promise reduced tax-rates and increased take-home pay. These companies are operating tax avoidance schemes which, when caught by HMRC, carry very hefty penalties for everyone involved.

 

What is tax avoidance?

Tax avoidance is when people or companies bend HMRC’s tax rules to pay less money than they should.

 

How does it affect you, the contractor?

As a contractor, you need to be wary of any person/company that offers to pay you in a manner that provides you with more take-home pay than expected.

Anyone who uses or benefits from a tax avoidance scheme is exposing themselves to a high level of risk. This is because everyone in the UK is required, by law, to pay the correct amount of tax to the government, dependent on their earnings.

If you are caught using a tax avoidance scheme, you will be required to pay back the tax that is legally due, plus interest, and you may have to pay a fine.

HMRC are strictly cracking down on tax avoidance. This means even if you have appointed someone else to manage your affairs or received bad advice, you will still have to repay everything you owe.

 

What does tax avoidance look like?

Tax avoidance can be challenging to spot, especially if you don’t know what it looks like. One simple rule to follow is that if a company is offering huge tax savings, extremely high take-home pay rates (such as 80%, 90%, or 95% of your wages), or anything else that seems too good to be true – it most likely is.

The basic rate of Income Tax is 20%, and most people will pay national insurance on top of that. So, 80% (or higher) take-home pay is almost impossible.

 

Stop, Challenge, Protect

To help contractors avoid falling victim to tax avoidance tricks, HMRC has outlined the ‘Stop, Challenge, Protect’ process.

 

  1. Stop, and take your time

    Make sure you understand and feel comfortable with everything you sign. Usually, companies who use tax avoidance schemes won’t openly explain how they can help you pay less tax or take-home a higher rate of pay.If you’re unsure whether something is too good to be true, ask the person/company to explain the payment process or contract clause clearly, so you know what you’re agreeing to and its implications. If you’re still sceptical, seek independent professional advice before signing.
  2. Challenge what you’re being toldLook for warning signs:

– Is the contract too complicated to understand?

– Are they claiming you’ll pay less tax than you expected?

– Will you be paid as a normal employee (i.e through payroll and subject to PAYE) or will some of your income be paid to you as a ‘bonus’, ‘loan’ or ‘credit’.

– Will you be paid directly or will your pay be routed through various companies before it reaches you?

3. Protect yourself and others

If you think you have been offered a tax avoidance scheme, know of someone offering such schemes, or if you need help getting out of one, make sure you contact HMRC to report it on 0800 788 887 or click here to report it online.

If you are not involved in the scheme, you can report it anonymously if you prefer.

If you believe you are already involved in a tax avoidance scheme, contact HMRC as soon as possible. They will help you settle your tax affairs and get back on the right track. They can even help you to pay via an instalment arrangement if you can’t afford to pay off the entire sum at once.

 

For more information on HMRC’s Stop, Challenge, Protect scheme, please click here where you’ll find a range of useful resources.

Or, if you’re on the hunt for a compliant Umbrella company, Crest Plus Umbrella is FCSA-accredited so you can have peace of mind you’re contracting the right way. Click here to find out more.

Posted by: Crest Plus

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