Tax avoidance: if it looks too good to be true, it probably is

06 December 2018

HM Revenue and Customs (HMRC) is renewing its warning to individuals who work through agencies and umbrella companies not to be inadvertently drawn into tax avoidance.

 

Most employment agencies and umbrella companies operate within the tax rules, but some who claim their arrangements are ‘HMRC approved’ or ‘HMRC compliant’ do not.

HMRC does not approve tax avoidance schemes or arrangements and has published information on GOV.UK, to help understand what to look out for.

If you become aware of individuals using arrangements that claim to provide big tax savings, please warn them of the risks. All individuals are ultimately responsible for their own tax affairs.

 

HMRC doesn’t comment on individual companies or the arrangements they offer. If individuals are unsure about what’s being offered by an agency or umbrella company they should seek genuine independent advice first, as it may be tax avoidance.

Those who promote tax avoidance schemes or arrangements often assure individuals that they ‘are compliant with the tax rules’. These schemes offer 90% or 95% of take home pay. The basic rate of income tax is 20% and National Insurance Contributions (NICs) are also due on earnings.

 

Any scheme which claims to let individuals keep a very high proportion of their wages is probably a form of tax avoidance.

Some of these arrangements, will split monthly income into two payments:

  • a first payment, usually the smaller of the two, is subject to income tax and NICs deductions, and

  • a second and larger payment made in the form of a loan or payment from a third party, from which tax and NICs aren’t deducted. In reality, the loan is unlikely to ever be repaid, so it’s no different to normal income and is taxable.

This is not right and is clearly an arrangement to avoid paying tax.

 

The loan charge

One of the ways the government is tackling these type of arrangements is with the new ‘loan charge’. This will apply to all outstanding loans in these types of arrangements on 5 April 2019.

Anyone who has received such loans instead of standard income and who does not take action now to either settle their tax affairs with HMRC or repay their loans, will face the loan charge. They are likely to pay less by taking action and settling now, rather than waiting for the loan charge to come into effect.

Guidance has been published on GOV.UK to help people understand what they need to do to settle their tax affairs.