Contractors: Staying Informed on Tax Avoidance Schemes

Over the last couple of years HMRC has really started to crack down on tax avoidance schemes and to date has ‘named and shamed’ nearly 50 companies running these illegal schemes – you can find the full list of named companies here.   

It’s really important to remember that it’s your responsibility to pay your tax correctly – even if you appoint someone to do this on your behalf – which means that if you get stuck in a tax avoidance scheme you’ll still be expected to pay any backdated tax that you owe plus any penalties and interest incurred. And that’s on top of the fees you’ll have already paid to the tax avoidance scheme!

So what can you do to avoid getting caught up in one of these schemes and how can you ensure you’re tax efficient, legally? We’re outlining some top hints and tips in this blog post.

What is a tax avoidance scheme?

If you work as a contractor, an agency worker or through an umbrella company, it’s likely that you’ll need to be vigilant of tax avoidance schemes. As the name suggests, these schemes exploit the tax system by ‘bending the rules’ and illegally avoiding paying the correct amount of tax.

Tax avoidance schemes are often set up as umbrella companies (although the majority of umbrella companies are legitimate) or through loan and job board schemes. On top of promising to reduce your tax, these schemes will usually offer other incentives or benefits to entice you to join, but remember – if it sounds too good to be true, it usually is!

Top tips for spotting a tax avoidance scheme

The best way to protect yourself from a tax avoidance scheme is to be as vigilant as possible. Here are some red flags that can help you suss out a potentially unlawful scheme:

• You’ve been promised that you’ll pay less tax than you originally expected or you’ve been told that some of your payments are ‘non-taxable’
• The scheme claims to be ‘approved’ by HMRC. This is simply not true – HMRC doesn’t approve schemes!
• You’ve been told that you’ll only get taxed on part of your income
• You’ve been offered an ‘enhanced’ version and/or a cash bonus
• You’ve been asked to sign more than one contract
• You’re unsure how you’ll be paid or what is going to be deducted, and the information you’ve been given is confusing and complicated

These are all red flags that indicate the scheme you’re involved in is likely to be a tax avoidance scheme. Therefore, it’s important that you take the time to really understand what exactly it is that you’re signing up for and to make sure you know how it all works, how you’ll be paid and what will be deducted. Don’t be afraid to seek professional advice if you’re unsure and be sure to report any suspicions to HMRC.

HMRC is also running a really useful Don’t Get Caught Out campaign which has lots of information about how to spot these schemes, as well as a handy risk checker, all of which we highly recommend you familiarise yourself with. If you’re concerned that you’re already signed up with a tax avoidance scheme, get in touch with HMRC as soon as possible for support and guidance.

Manage your taxes – legally!

The best way that you can legitimately reduce your tax exposure and be as tax efficient as possible is to hire an experienced accountant, such as Warr & Co – because being tax savvy is very different to tax avoidance!

Here at Warr & Co, we work differently to many larger accountancy firms. You won’t see any traditional conveyor-belt style accounting services here. We treat every client as an individual, and we’re proud to create custom-built packages that are designed around your specific requirements.

We work with a variety of contractors, including IT consultants, management consultants, process engineers, legal consultants and locums, and offer a range of accountancy services that you can pick and choose from. Find out more about our contractor accounting services, pick up a copy of our free contractor guide or book your free consultation now by filing in the form below. Let’s work together to manage your taxes the right way!