Offshore Umbrella Companies

10 July 2012

Offshore Umbrella Company

We’ve all heard this famous saying “If it’s too good to true, it probably is!” on the news recently in respect of Jimmy Carr and Take That members who have been paying considerably less tax (in percentage terms!) than the rest of us.

What it highlighted is that although there has historically been a difference between tax avoidance - where someone legally pays less tax and tax evasion - where someone illegally pays less tax. Schemes that in the past have been considered OK if you can find a loophole and beat the system are now being described as “morally wrong” by David Cameron. This is despite the fact that David Cameron’s own father is reported to have used a similar scheme to help pay less tax!

What is also a worry for people using these schemes is that HMRC can retrospectively make them illegal meaning a scheme you though was legitimate can be made illegal with you owing considerable amounts of tax and costs. HMRC don’t like them and make changes so the loophole is closes. BN66 means HMRC can go as far back as 1987!

What does all this mean for temporary workers you are placing?

Basically people can’t go wrong if they follow the basic rule is that if you live and work in the UK you have to pay UK taxes and that where applicable the most tax efficient way for contractors to be paid is by working through your own limited company.

However even these have come under scrutiny in recent weeks with a number of high ranking government officials using them to “disguise employment”. HMRC have also just launched a risk based IR35 Business Test.

IR35 Business Test

The HMRC Business Test will in reality will put the majority of contractors working through their own limited companies in the high risk category. Although this is a new approach by HMRC the IR35 legislation hasn’t changed and hence the expected outcome of any IR35 case is unchanged.

The change in HMRC’s approach seems to be more based on worrying contractors into believing they are doing something wrong and that they could fall into an HMRC investigation and lose.

To help this process of encouraging contractors switch to a PAYE Umbrella they have written to all contractor run limited companies asking them to reply confirming if they are high, medium or low risk.

Clearly this process will however worry many into switching away from limited and if people want to be 100% sure then being paid by PAYE is the safest options and the most tax efficient way is through an umbrella company.

What is an offshore Umbrella Company?

These are companies that offer you a return of between 85 and 90% of your earnings.

They are very vague on their websites how they work but in sales calls describe a tax free dividend.

In reality they are very similar in concept to the Jimmy Carr scenario where loan income is deemed to be tax free.

On a negative the contractor is generally charged high fees and will be liable for the taxes (and costs) if the scheme fails.

While they probably currently fall into tax avoidance rather than tax evasion the current advice is to avoid these schemes as they are not liked by HMRC or the Government, especially David Cameron.

Why PayMatters?

Run by a Chartered Accountant who is a member of ICAEW.

Apsco affiliate member

Professional Passport audited and accreditation.

PAYE Umbrella and Accountancy Services to Owner Managed Limited Companies.

PLUS NO OFFSHORE!

Please call PayMatters Umbrella Company on 0800 121 6513.