Tax avoidance schemes: the warning signs

‘If it sounds too good to be true it usually is’

With the threat of IR35 growing as a result of recent and incoming reforms, there seems to have been a rise in the number of firms promising contractors simple solutions and easy workarounds to this tax legislation, which has caused so many problems for independent workers in the last 20 years.

You might have noticed this yourself. You don’t have to look too far to come across one of these schemes, which is often promoted by the provider on Google. These companies might guarantee IR35 compliance and advertise to contractors that they can help them take home somewhere between 85% to 90% of their earnings - a figure which frankly cannot be achieved without breaking the rules somewhere along the road.

The old adage, ‘if it sounds too good to be true it usually is’ has never been more accurate with regards to these questionable schemes that are designed to maximise tax efficiency. And as we’ve seen with the recent arrival of the Loan Charge, even if the Government isn’t paying attention to them right now, HMRC has no problem probing them a number of years down the line.

Therefore, it goes without saying that any arrangement a contractor enters into with a view to operating tax efficiently, has to be compliant. You only have to look at the devastating impact of the Loan Charge to realise that being pursued by an increasingly aggressive HMRC can take its toll, financially and emotionally speaking.

However, there are several clear warning signs to look out for when shopping for IR35 solutions. To help you make a well-informed choice, we’ve highlighted a number of the things you should consider.

Unrealistic take-home percentages

Keeping up to 90% of your earnings after tax and operating compliantly is unachievable, irrespective of whether you work outside IR35 or not. The companies that say they enable this could well be bending the rules. Assuming they aren’t (and the likelihood is they are) there’s nothing to say that HMRC won’t inspect their activity in years to come - which has been the case with the arrival of the Loan Charge.

Overpromising and guarantees

With the right IR35 advice contractors can be very confident in their IR35 status. But it’s dangerous territory for any tax advisor or so-called expert to guarantee compliance. For one, the IR35 legislation is incredibly subjective.

Other terms, such as ‘QC approved’ are occasionally used as selling points on the websites of these companies. They use it as a mark of trust. However, as Qdos CEO, Seb Maley, explained in The Sunday Times recently: “Even if a QC’s opinion was given, it does not mean HMRC cannot challenge it.”

Lack of company information

A number of promoters of tax avoidance schemes give limited, if any, company information on their website. You’d be wise to do your research to make sure the business is legitimate and can be trusted before asking for their help. Do not necessarily be swayed by TrustPilot scores or reviews from other contractors either. They might have bought into these schemes not knowing that they aren’t compliant.

All too often, these kinds of companies close down and disappear the moment HMRC starts looking into their activity. Again, the Loan Charge is an obvious example of this. It has left contractors with enormous tax bills to pay. Many promoters of these services, however, are nowhere to be seen.

A number of tax avoidance schemes aren’t based in the UK either. So it’s worth checking to see where their registered office is located. For example, a large portion of the promoters of disguised remuneration schemes operated from The Isle of Man for tax purposes.

Convoluted payment process

A promoter of a tax avoidance scheme might, for example, pay you in loans or via offshore trusts that are sold on the basis that income tax and national insurance contributions do not need to be settled. This in itself is a clear warning sign of a disguised remuneration scheme. In fact, contractors should be suspicious about complicated payment processes and elaborate and vague descriptions of the way a scheme actually works.

While the majority of tax professionals are credible, honest and operate within the law, there are inevitably businesses looking to take advantage of the confusing IR35 climate. And it’s unlikely that HMRC will be sympathetic towards contractors who have bought into these schemes mistakenly either. When looking to settle tax avoidance cases, history suggests HMRC will take what it considers the path of least resistance, which it clearly views as contractors.