New tax avoidance schemes to be aware of.
Posted on 25 August 2017
Since the changes to IR35 in the public sector came into force earlier this year, there has been a rise in non-compliant umbrella companies offering schemes which claim to help doctors take home more of their pay.
How does the scheme work?
The contractor receives payment in two parts. One small sum is recorded as salary and is subject to Pay As You Earn (PAYE) income tax and National Insurance Contributions (NICs). Meanwhile, another larger lump sum is paid as a 'taxable discretionary bonus'.
What the scheme doesn’t make clear is that the contractor will be liable for tax on the lump sum at a later date.
The particular umbrella company offering this scheme operates by asking the contractor to state their desired take home pay; say 79% of their gross income. The umbrella company will then engineer the payslip to allocate a lump sum as a 'bonus'.
This gives the impression that the contractor has achieved their desired income, but it fails to point out that the bonus will be subject to tax.
Is the rise in non-compliant umbrellas down to IR35?
"We warned HMRC that this would happen. Contractors are always looking for the best deal, and many are being enticed by umbrellas promising a high return on their income. These contractors need to remember that it's not the scheme promoters who HMRC will go after for unpaid tax and NICs, it's them."
A lack of understanding of tax law could prove costly for some contractors. These schemes are cropping up all over the place in the wake of the IR35 reforms, and contractors without a firm grip on tax law are being misled into using them. They simply do not work and contractors are strongly advised to avoid them.
Characteristics of a non-compliant umbrella company
The promise of unrealistic tax savings should provide a clear indication that you are dealing with a dubious umbrella company.