Offshore tax schemes or UK Limited company?

It would be impossible to have missed all the coverage about HM Revenue and Customs and the Government investigating allegedly reported tax evasion strategies used by offshore tax schemes in 2012.

According to a 2012 report by the National Audit Office titled ‘Tax avoidance: tackling marketed avoidance schemes’, over 41,000 cases with up to £10.2 billion at stake are currently being investigated by HMRC. These are companies or clients that the Revenue believes to be working through offshore tax avoidance schemes or a loan which avoids those involved paying full UK tax rates even though they work and live in the UK.

If investigated, the scheme could potentially be shut down by the Revenue with the company or client required to pay back any missing tax backdating as far as the Revenue sees fit. Below are just some of the cases throughout 2012 investigated by HMRC, some of which you will be very familiar with:

19th June 2012 – The Guardian reported:

“Tax avoidance scheme used by Jimmy Carr investigated by HMRC”

“A tax avoidance scheme alleged to be used by comedian Jimmy Carr went under investigation by HMRC authorities. HMRC told the Guardian that accounting firms using a scheme to create offshore loans and new contracts of employment for UK earners were being investigated and could be taken to court.”

Carr is alleged to have sheltered £3.3 million a year by funnelling millions of his assets to a Jersey based scheme.

21st June 2012 – The Telegraph reported:

“Take That singers’ invested £26m in scheme to be challenged over tax avoidance”

“Members of pop group Take That invested at least £26m in a scheme believed by HMRC to be a method of avoiding tax, it has been claimed.”

If HMRC are found to be correct, the company partnership run by Icebreaker Management Services could have to pay back millions of pounds.

5th October 2012 – The Daily Mail reported:

“BBC Watchdog presenter Anne Robinson ‘avoided paying tax on £4m’ after joining aggressive scheme to shelter earnings.”

“Anne Robinson avoided paying tax on £4million after joining an aggressive scheme to shelter earnings from the Treasury, it was claimed. The BBC Watchdog presenter was one of the largest participants in the Liberty tax strategy which enabled investors to pay just 7p in the pound to the company rather than 40 per cent income tax.

Liberty exploited a loophole to buy and sell dividends offshore to generate more than £1billion in artificial losses which members could offset against their tax bills. It was first investigated by the Inland Revenue 2006 and was eventually shut down in April 2008 when legislation was brought in to close the loophole. “

9th November 2012 – Accountancy Age reported:

“Taxman investigating HSBC offshore accounts.”

“A list of HSBC offshore account holders passed to HMRC is under investigation for potential tax evasion and money laundering. Over 4,000 UK residents appear on the list which was leaked by an HSBC whistle blower.”

HMRC are currently studying the data with Accountancy Age reporting that “penalties for offshore tax evasion can be as much as 200% of the tax owed, while criminal prosecution is also a possibility.”

Of course there are those rare cases where the Revenue has had the case rule in favour of the scheme holder.

In November 2012, following a challenge from HMRC, Rangers Football Club appealed its use of Employee Benefit Trusts (EBTs), arguing that“the payments to players and staff were through loans which can be repaid.”

It was ruled in a first-tier tribunal that payments made to players and staff at Rangers Football Club in a contentious tax scheme were not illegal. However, HMRC are currently considering an appeal on the above verdict.

So, with so much scrutiny surrounding offshore tax schemes, what are the benefits of using an offshore tax scheme compared to contracting through your own legitimate UK Limited company? Surely the benefits must be vast when you weigh up the reported downsides and heightened awareness and commit to investigate ‘special schemes’ by HM Revenue and Customs.

Some offshore companies seem to provide take home pay illustrations of around 80% - 85%. For example Jimmy Carrs scheme quoted take home pay of around 82% based on a £100,000 contract. However, and maybe surprisingly enough, a contractor working through their own legitimate UK Limited company could take home around 75% based on the same £100,000 contract, obviously without the stress and worry that HMRC could close the loop-hole potentially resulting in back taxes and penalty charges being levied.

On the 24th November 2012, BBC News published an article about HMRC targeting ‘tax avoiders’. In this article they published the following extract from the tax letters to be circulated by HMRC for those they wish to investigate:

"We are committed to challenging aggressive tax avoidance, and we will do so through the courts where appropriate. If we do this then it will lead to years of uncertainty about your tax affairs, and mean considerable additional cost to you. We are already challenging similar schemes and we have a very successful track record in the courts with schemes of this type.

Your decision to use a scheme such as this means that we will treat you as a higher risk customer. Therefore we will monitor more closely your tax affairs in the future."

So are special schemes worth the risk? Only you can decide.

If on balance you think opening a UK Limited company might be the best option for you, visit our company formation page here. Setting up your own Limited company takes only five minutes with your company set up within a few hours.

For more information on working through your own Limited company visit our: Advantages and Disadvantages of a Limited company page or download a free copy of our 60 page comprehensive contractor’s guide.

SJD Accountancy offer a low cost all inclusive fixed fee package which covers all of your business and personal taxation needs starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about becoming a contractor, would like to discuss becoming a client of SJD Accountancy or would like further advice please do not hesitate to contact us on 01442 275789 or email: jessica@sjdaccountancy.com

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SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

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