If you are a contractor who needs to operate using an umbrella company as your employer, you are likely to have heard of tax avoidance schemes, often called disguised renumeration. These schemes will tell you that you can keep as much of your pay as possible. You should also know that it is illegal to hold back income tax or National Insurance Contributions NICs so what may sound good and look good on paper will ultimately cost you more in the long run.
To help you make up your mind as to whether you want to use an umbrella company that is compliant with tax laws or whether you want to take the chance of using a company that disguises its renumeration packages, here is our simple guide to why they are usually too good to be true.
You may be told that these schemes are legal, and this isn’t “tax avoidance”, but it is! If you pay the incorrect amount of tax on your gross pay and your tax return is incorrect, it is not in accordance with the UK tax laws. When this is the case, you will legally be obliged to pay the tax that is due and may be charged penalties if you try to avoid it.
- It could cost you more than you think
Avoidance schemes are quite complex and as such there are hidden fees that you can pay to the promoter. This doesn’t count as paid tax, so you may end up paying this money twice over. The risk that you take may mean that you are much more out of pocket than just paying your legitimate income tax bill.
- You may have a hefty legal fees bill
If the scheme is taken to litigation, it is likely that you will need to pay legal fees towards this. Some promoters even ask people to pay towards this “fighting fund” upfront.
- You can face criminal conviction
As we said, tax avoidance schemes are against the law and by using one you are entering into illegal activity. If you deliberately mislead or hide any information from HMRC, you can be prosecuted and convicted.
- You could face negative publicity as a “tax dodger”
If there are litigation trials, you can be named in court papers and on public registers. You may even make it on to the pages of local or national papers – and that is never good for reputation.
- Your scheme is not HMRC approved
When umbrella companies have schemes that HMRC are investigating because they show signs of being designed to avoid tax, they may have a Scheme Reference Number which is issued to demonstrate that the company is under some form of HMRC investigation.
- You may be marked out as a high-risk taxpayer
If this happens, all your future tax affairs will be closely scrutinised.
- HMRC is likely to beat your scheme in court
HMRC wins 90% of the cases when they take avoidance schemes to court. Many more are settled out of court in the favour of HMRC.
- You will bear the risk
The promoter of the scheme is unlikely to give you a guarantee that the scheme will work, and it is even less likely that they will be with you then HMRC begins to investigate your tax affairs. Some of these promoters simply set up, sell the scheme, and then disband leaving you to pick up the pieces.
If you end up in a dispute with HMRC and they are investigating a scheme, you will be issued with an Accelerated Payment Notice requiring you to pay the disputed tax up front. You won’t see that money again until HMRC decide if they will take no further action (and this will be unlikely).
Ultimately you may choose to roll the dice and take the gamble, but if you do, please bear in mind that you are more than likely to end up worse off. Don’t just take our word for it, we based our guide on the GOV website – here’s the link so that you can read what they have to say: https://www.gov.uk/government/publications/ten-things-a-promoter-of-tax-avoidance-schemes-wont-always-tell-you/ten-things-a-promoter-of-tax-avoidance-schemes-wont-always-tell-you