Over many millions of years the rotation of the moon has been slowed down so that only one hemisphere is ever visible from the Earth the invisible hemisphere is known as the Dark Side.
If you’re a contractor you may be approached by companies promoting tax planning solutions which will make you just as invisible to HMRC as the Dark Side of the Moon is to the Earth.
The organisations now targeting contractors typically offer returns of 82% – 83% of contract income. I even came across one offering 90%. They are quick to point out that their tax planning is tried and tested and is not tax avoidance. Oh, and of course, they all have counsel’s opinion.
The way these schemes operate is really quite clever. They’ve taken the loan structure that some well known Isle of Man organisations used in the second half of the last decade and played around with it in two key areas: a) they’ve structured their schemes in such a way that they fall outside the HMRC disclosure regime known as DOTAS; and b) the contractor retains his existing personal service company which becomes part of the solution.
The promoter will explain that your company continues to prepare accounts and file them at Companies House and HMRC. You will be discouraged from claiming expenses other than a small salary and instead, you will receive monthly invoices from an Isle of Man company basically equivalent to the remainder of your turnover which your company will pay. You are likely to receive some taxable income from the Isle of Man company perhaps under a self employed contract, but the bulk of the monies after deduction of a fee of around 10% will be loaned to you on an understanding that those loans will never need to be repaid.
Of course, if and when HMRC become aware of a contactor using this type of tax planning, they will attack it with the same vigour they use against all schemes that they consider to be tax avoidance and they will almost certainly be successful. The problem HMRC face is that they receive many millions of accounts and self assessment returns and very few are flagged up to be looked at. The promoters will tell you that if you join their scheme you will be a “needle in a haystack”. Of course, HMRC will occasionally find a contractor using this type of planning by luck, but if they then ask the promoter in the Isle of Man for details of all of the other contractors using this planning, they will get no response.
So is it a good idea to place yourself on the Dark Side of the Moon? What can possibly go wrong? Well what often goes wrong is that promoters get greedy. They want to make as much money as possible as quickly as possible. They do not place themselves with you on the Dark Side of the Moon, they want to be visible to attract new contractors. They open UK offices and advertise on the Web. In making themselves visible to contractors they also make themselves visible to HMRC.
One promoter I came across recently has even acquired a contractor accountancy business. They are trying to attract new clients by offering free accountancy services for 3 years. Given that a charge of about 10% of turnover is made for the tax planning you might wonder why only 3 years. Perhaps that’s an indication of how long that particular promoter believes it will be before it is time to quietly close down the UK accountancy business and the Isle of Man company and re-invent themselves.
So what can you expect if you fall prey to one of these tax planning organisations? Well it will go well to start with, you’ll receive the payment they promised you each month, your company admin will be a lot more straightforward and you’ll get used to your new lifestyle and improved standard of living. Your accounts and self assessment returns will be filed on time, you’ll make some small tax payments and you’ll receive statements from HMRC showing that everything is up to date.
Then one day you’ll get a brown envelope with a long letter from HMRC. It might take 1 year or 5 years, but it will come. The letter will tell you that HMRC believes that the tax scheme is tax avoidance and that is does not work. They will want to collect tax and interest on every penny you’ve been paid while you’ve been in the scheme. They may also want tax from you on the profit made by the Isle of Man company.
So if anyone offers you a free ticket to the Dark Side of the Moon, beware! It will seem like a nice place at first but then you’ll realise that you’re in an inhospitable unfriendly place a long way from home. And the return ticket will be very expensive, perhaps too expensive for you to ever get back.
A few weeks ago a colleague posed this question: “Could a contractor get similar returns to those offered by the tax avoidance industry by using legitimate tax planning techniques?”