The Risks of Tax Avoidance for Contractors

Tax avoidance

We understand why contractors are tempted by tax avoidance schemes. IR35 chaos in the public sector has caused many contractors to lose an extra chunk of their pay to the tax man, and it’s understandable that many of them have searched for a solution. In any case, who wants to pay more tax than they need to? If there’s a legitimate way to shrink your tax bill, why wouldn’t you use it?

And that’s the point. If there was a legitimate way for you to take home 80-90% of your contract rate, we’d all be using it. Orange Genie, as responsible experts with your interests at heart, would be leading you towards it with a big neon sign.

Unfortunately, there isn’t. And yet, if you’ve researched contractor pay online we can almost guarantee that you’ve come across companies who say there is. Those people are lying to you. They’re hoping to profit from putting you at risk.

With the contracting industry holding its collective breath for news of private sector IR35 reform, it’s more important than ever to know you’re getting accurate, trustworthy advice.

How to spot a tax avoidance scheme

Your first clue is that they’ll quote a take-home figure that’s far in excess of anything a compliant provider can offer. Typically, they’ll pay you a small amount as taxable salary and the rest as a loan, which is not taxable as long as it’s not written off. There’s usually no expectation that you’ll repay the loan.

The problem is that once the loan is written off it becomes taxable in full, and if it isn’t written off the supplier are within their rights to ask for payment. Additionally, if you have such a loan outstanding in April 2019 you’ll have to pay an additional charge to HMRC. We’d advise you to walk away immediately at the first suggestion that part of your pay will be paid as a loan.

If you have an existing loan:

The loan charge will apply to any loan you received through a tax avoidance scheme on or after 6th April 1999 that is still outstanding on 5th April 2019. That first date is not a typo; the charge really does apply to loans going back 20 years.

Any outstanding loan balance, including any accrued interest, will be taxed as earned income falling in the 2018/19 tax year, unless you settle your tax affairs and pay what you owe.

HMRC have provided an opportunity to settle your affairs, but this closes on 31st May 2018. If you have an existing loan, it’s vital that you seek advice as soon as possible. If you’re lucky enough to have an Orange Genie accountant, contact them without delay to talk over your options.   
 

The risks of using a tax avoidance scheme

Whatever promises your Google search threw up, here’s what’s likely to happen if you get involved with a tax avoidance scheme.

You won’t get what you paid for

You’ll be paying the provider for a service that doesn’t do what they claim. In the long term you’ll likely have to pay any tax you’ve avoided, plus interest and penalties, so all you’ll actually have bought is a big headache and a bigger tax bill. The provider, meanwhile, will get to keep all the money you paid them for this “service”.

Penalty charges:
The tax avoidance scheme will effectively create an “inaccuracy” in your tax affairs, and HMRC will charge penalties according to your “degree of culpability” for that inaccuracy.

Careless action (or failure to take reasonable care) 30% of the potential lost revenue (the tax you attempted to avoid)
Deliberate action 70% of the potential lost revenue
Deliberate and concealed action 100% of the potential lost revenue

So, you can expect to pay all the tax you would have paid, with an additional penalty of at least 30% of the amount you attempted to avoid.

It could cost you a lot of money

In addition to the supplier’s fees and the interest and penalties that will be added to your tax bill, you might also find yourself paying for legal advice, or even legal representation if your case goes to court. If you thought your tax bill was high, wait until you get one from your solicitor.

You might have to pay before your case is decided

For example, the Telegraph has reported on the case of a Mr. Adams (not his real name), an IT contractor who was ordered to pay a total of £27,900 in unpaid tax for a job he’d held seven years earlier. Using an accelerated payment order, HMRC told him to pay immediately, on the basis that he’d receive a refund if he proved his innocence. According to the Telegraph, Mr. Adams tried to set up a payment plan with HMRC and was denied, meaning he faced bankruptcy if he couldn’t find the money within months. 

You’re unlikely to win in court

HMRC wins 80% of tax avoidance cases, and that’s just the ones that go to court. Many more settle before it goes that far because they know they don’t have a case. HMRC are taking a very hard line against tax avoidance so you can expect no sympathy or flexibility from them, even if you didn’t know what you were getting into.

In the unlikely event that a scheme works, the law can be changed retrospectively

Ask Robert Huitson, an electrical consultant who used an offshore tax avoidance vehicle based in the Isle of Man. In March 2008 the law was amended, meaning Mr Huitson was now caught retrospectively by rules that didn’t exist when he was using the scheme.

Mr. Huitson has mounted several legal challenges, claiming it was unlawful to change tax legislation retrospectively. These included an application to the European Court of Human Rights and two judicial reviews. All have failed, leaving him with a bill of around £195,000 for unpaid tax, NICs and interest. 

You could end up with a criminal record

If you’ve deliberately paid less tax than you should, you could be guilty of criminal tax evasion. Ignorance of the law, even if you were misled by some smooth-talking shark, is no defence and conviction could leave you with a criminal record. For many, this is a life-changing event, potentially affecting your personal life and your career.

Contracting could become more difficult

As part of their investigation, HMRC may contact your clients to assess their involvement with the scheme. This could put important professional relationships under pressure, as your clients wonder if you’ve put them at risk. Many recruiters will refuse to work with non-compliant providers, because doing so can have serious consequences for them, which means the scheme could cost you work as well as money.

HMRC are taking an ever-harder stance on tax avoidance and evasion, and with the public and press cheering them on this is unlikely to change. They have extensive powers to investigate non-deliberate avoidance going back up to 12 years, so more and more it’s a matter of when they’ll catch up with you, not if. The best protection is to make sure your umbrella employer or accountant is an FCSA Accredited Member, as this confirms their commitment to doing things properly.

If you have questions about tax avoidance schemes or if Orange Genie can help in any way please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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