Tax avoidance using capital advances, joint and mutual share ownership agreements
31 July 2019
HMRC is aware of a number of schemes designed to avoid Income Tax and National Insurance contributions (NICs) through a combination of capital advances and complex offshore joint (or mutual) share ownership arrangements.
HMRC regularly publish ‘Spotlights’ which includes information to be aware of about tax avoidance schemes that it believes to be live and widely available, to help those using them to avoid tax.
The latest ‘Spotlight’ is about tax avoidance using capital advances, joint and mutual share ownership agreements (Spotlight 53).
How the schemes are claimed to work
Under the arrangements, a contractor becomes an employee of an umbrella company or a connected entity, such as an offshore company. The employee may sign a loan or capital advance agreement and a joint (or mutual) share ownership agreement, confirming how their salaries are to be paid, by the employer company.
The employee is paid through two separate payments, on a weekly or monthly basis. The first payment represents a nominal salary, resulting in payment of little or no Income Tax and NICs. The second payment may involve ‘capital advances’, paid in the form of weekly or monthly loans.
The employer company then carries out various share transactions, involving an offshore joint (or mutual) share ownership trust. These are said to result in financial gains for the employee. The shares may also attract a dividend for the employee. The employee has no direct involvement in the share transactions but receives monthly or yearly summaries that show their outstanding loans have been repaid as a result of the capital gains and dividends.
Through this process, these schemes attempt to disguise an employee’s earnings, which would ordinarily be subject to Income Tax and NICs. By using capital gains or dividends that attract other tax reliefs, the employer company attempts to avoid its tax liabilities as well.
These types of schemes are never approved by HMRC and employers and employees are likely to end up paying additional tax and interest and may be subject to penalties.
Full details can be found on GOV.UK about:
- What will happen if you use these schemes
- What this means for tax avoidance promoters
- What to do if you’re using these schemes