What you need to know about tax avoidance schemes

The Government has recently published a document with guidance about what you need to know about tax avoidance schemes. Called ‘Ten Things About Contractor Loan Schemes’, it indicates how concerned they are with so-called tax avoidance schemes. These schemes are an area of contractor finance for contractors operating via an umbrella company which have allowed them to extract income from their company in the form of a loan and thereby avoid paying a high amount of tax.  As contractor accountants in Stockport, we know the last thing that contractors need is the HMRC targeting them to investigate their finances.

Many of the most well-known tax avoidance schemes are set up in a way where the contractor gets paid their salary in the form of ‘loans.’ (which are not taxable) rather than a salary and dividends (which are taxable).  These ‘loans’ differ from normal loans in that they are never expected to be paid back – so it is no surprise that these schemes have been investigated.

HMRC are now starting to clamp down on this type of activity much more aggressively than they have done to date, so here is a brief summary of the ten things that the Government wants freelancers and contractors to know about these tax avoidance schemes:

  1. Despite what the companies involved in these schemes might tell you, any loans that are made to contractors are taxable.
  1. Contractor loan schemes are never approved by the HMRC, and any individual or company who is involved in a tax avoidance scheme has to obtain a Disclosure of Tax Avoidance Scheme (DOTAS) number from the HMRC. This means that HMRC then has a record of the scheme.
  1. However, the fact that a scheme has a DOTAS number does not mean it is exempt from being investigated by tax authorities.
  1. The vast majority of DOTAS schemes have not been investigated so far, but HMRC does claim that it wins 80% of the cases that it takes to court.
  1. The HMRC are increasingly using Accelerated Payment Notices (APN’s). This is a notice that forces the receiver to pay any disputed taxes in full within 90 days, even before their case has got to court – which is a little bit controversial.
  1. The recently released document also reveals a little-known fact, in that if you have been remunerated via a loan from a tax avoidance scheme at any point in your career, then there may be implications when it comes to inheritance tax.
  1. If you are suspected of being involved in a tax avoidance scheme and the HMRC decide to investigate you, then they may contact your clients to discuss the true nature of your contracts. This is quite concerning for many contractors – regardless of whether they are in an avoidance scheme or not.
  1. The HMRC also state in this document, that they may contact other creditors of yours, such as your mortgage provider to see if there is any discrepancy between the income you have declared to them and the income you have declared to HMRC.
  1. It also warns contractors that they are very much on their own when it comes to any potential investigations, as they have seen a lot of instances where the umbrella company has disappeared off the scene when complex investigations are mooted.
  1. In last week’s Autumn Statement, the Chancellor of the Exchequer re-emphasised his aim to raise an extra £5bn a year by tackling tax avoidance and using aggressive tax planning.

If you want to discuss any aspect of contractor accountancy, then please give our experienced team a call on 0161 456 9666 or send us an email to askus@in-accountancy.co.uk

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