Contractors working in the UK who want to save tax by working through an offshore tax scheme now face enormous uncertainty on their UK tax obligations.
These offshore schemes work by diverting income earned in the UK through a foreign company/bank account, which is then routed back to the UK thus avoiding most UK taxes. Typically the contractor earns around £12,000 in salary (which is taxed in the UK), and the remaining funds paid to the contractor are in the form of non-repayable loans (which are not taxed).
While the effects of such an arrangement reduce the contractors tax liability, other unintended effects are the contractor has difficulty proving their earnings for credit applications (such as a mortgage), and importantly for our clients, the loan component of payments received are not recognised by the Home Office if earnings needs to be proved for a Visa application.
Her Majesty’s Revenue and Customs (HMRC) strongly dislike offshore tax schemes and as they have spelt out in Budget Note 66 (released on 12 March 2008 – see www.hmrc.gov.uk/budget2008/bn66.pdf ) they intend to apply retrospective legislation to get their fair share of taxes off contractors who have used (or are using) such schemes. The legality of applying retrospective legislation has been challenged in the courts, but on Thursday 28 January 2010 the Royal Court of Justice ruled the retrospective effect of BN66 is not unlawful.
This is very bad news for contractors who have EVER used an offshore scheme – no matter if they used the scheme for one day or two years, the HMRC are able to catch contractors going all the way back to 1987 to collect both fines and backdated taxes.
But this all goes back to the saying “if it sounds too good to be true, then it usually is”. If you live in the UK, work in the UK, and get paid for the work that you do in the UK then there has never been a legal way of avoiding paying UK taxes. While the offshore scheme providers have slipped through in the past, we think with the current economic climate the HMRC will concentrate on collecting all the tax they can, and contractors who have worked (or are working) through offshore scheme providers now face the enormous risk that they will be targeted.
Our advice to UK contractors who use an offshore scheme provider is that they contact the offshore company to determine what their likely UK tax liability will be in light of this legislation. They should also be getting regular updates from their offshore scheme provider on the risks they face, and updates on new developments as they come to light.
For UK contractors who want to work legally and tax efficiently in the UK, using their own UK limited company is still their best option, and any accountant will be able to explain the benefits of doing this. If you would like any information regarding our accounting service please take a look at www.no-worries.co.uk/company-management-howitworks.asp, or else feel free to call.