So you work in the UK, live in the UK & are paid in respect of the work you do in the UK. Why then would a contractor think that they could get away without paying tax in the UK?
For a number of years now, freelance professionals have had their heads turned by the apparent lure of offshore tax schemes and the promise of a higher level of remuneration in their hands more quickly than if they worked through their own UK limited company. It is this “money today” incentive that is often the motivating factor to sign up to one of these products.
Offshore tax avoidance schemes come in a variety of complex structures. Typically, either the individual contractor or their limited company has the relationship with their client and invoice for the work they have undertaken. The remuneration is then filtered to a Third Party arrangement based offshore. The scheme has the discretion to direct the funds to some form of trust which returns the money to the original contractor by way of a non-taxable loan which apparently does not have to be repaid! Make sense? No, we don’t think so either.
The schemes are sold to contractors on the basis that they will receive 82% – 90% of their contract income. The contractor will be advised to receive a minimal salary usually just above the tax free limit so that a very small amount of income tax and national insurance is payable. This can represent as little as 3% of income, leaving the remainder to be paid to the provider in fees. I’m not suggesting that a contractor shouldn’t try to operate in the most tax efficient way possible but where would you rather the money goes – villas and yachts to the scheme providers or to the tax man?
HMRC are now adopting a more aggressive stance and are taking a “guilty until proven innocent” approach with their Accelerated Payment Notices. What they are basically saying to members of offshore schemes is that they must pay the tax due as if they were employees (so there may be some liability at the 45% level plus 2% National Insurance) until HMRC decide whether or not the scheme can be approved. This can mean tens of thousands of pounds to be paid up-front.
Working through your own UK registered limited company, adopting an optimised income strategy and by using some simple tax planning, you are able to get your total tax down to between 10% – 18%. In many circumstances, the income levels can be even better than the offshore schemes. All without the risk of the taxman’s hand on your shoulder in the future. Additionally, for those contractors on the Flat Rate VAT scheme they will remain at least 3% better off & even a relatively simple matter such as taking out a mortgage is easier without the need to enlist specialist advice as is inevitable if the offshore option is taken.