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Interesting income tax avoidance scheme

I'm currently looking at doing some (IT) contracting and some guy just called me (got details from a recruitment agent) and spoke of a scheme provided by the company he works for that means contractors can take home much more of their hard-earned. He stressed the scheme was IR35 compliant. Blah blah.

Now my wife actually is a chartered acountant (though these days working in property tax) and as she actually *is* a contractor I called her and mentioned this scheme to her. She was dubious, but said she might contact the guy to talk more about it.

I thought I'd ask here, to see if anyone knowledgeable thinks this looks possible (legal) because the figures he gave me looked too good to be true.

He said based on a notional contractor salary of £90k a year (we just used that figure as an example), I'd take home £71k. He said (and you'll excuse my lack of correct terms) what happens is this: you get paid (by this company) 15% of your earnings as a proper salary, paying income tax and NI. So in this case, you get paid 13500k a year (less tax), so about £900 month. The rest is paid into a Trust in the Isle of Mann and you get paid from this every 6 weeks. But he said as it's a Trust, you're not subject to IR35 (because no shares/dividends) and I think he said it (the payment) is treated as a Benefit In Kind instead....whatver, but he said;

"we would propose a structure based on you remunerating yourself 15% of your income via PAYE and the balance would be payable via a structure that attracts tax at a rate of no more than 1.2%."

Ok...so this does sound too good to be true. I just wanted to know if anyone skilled in this area thought it likely that such a scheme was possible? He said the company worked mainly in the area of doing tax scheme for High Net Worth individuals. *shrug*.

Just interested. Thanks for any comments offered.

Tom

Reply to
TimmyBianco
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Some of these Isle of Man schemes do work - but they generally have a limited shelf life. Currently, these schemes have to be registered with the Revenue, who generally ammend the legislation at the first opportunity.

Usually, if a few people are benefiting from these loopholes, they can carry on for a while. But if lots of people are benefitting, you can bet they will be blocked in the near future - at which point the tax gurus will release a modified version of the same arrangement.

These can operate because there is a double tax treaty between the Isle of Man and the UK. Therefore, if you have already been taxed in the Isle of Man, you can't be taxed again in the UK - even if the IOM rates are minimal.

I think I know what this scheme is, and who is running it, and to my knowledge, it is working well for a lot of IT contractors.

The tax specialists will argue that if the Revenue and politicians cannot word the legislation correctly, then why should they not take advantage of it ?

On the other hand, you have to remember that this is aggressive tax planning, and do not be surprised if the Revenue challenged you in the future......

Reply to
sylvian stone

Thanks for that Sylvian.

With reference to "do not be surprised if the Revenue challenged you in the future...... " are you referring simply to the Revenue closing such "loopholes" in future? Or are you saying that the Revenue might seek to employ some kind of retrospective legislation Re the 'earnings' I had made under such an arrangement?

I'd been led to believe "retrospective legislation" was not likely (in fact impossible) because EU law had decreed it so (after some test case involving the Revenue)?

Thanks

Tom

Reply to
TomW

The Revenue could do either, but in most cases it is likely to be the first option . i.e. they make the arrangement ineffective with immediate effect, and then you are in the position of paying the normal amount of tax, or finding another arrangement.

They rarely impose retrospective legislation, but have done so recently for certain types of trust which people have been using solely to avoid Inheritance Tax liabilities. Whether this will be challenged and overturned in the courts remain to be seen.

Generally, if you use one of the reputable Isle of Man Tax & Trust companies, they will have got a QC's opinion on their scheme, and would defend it through the courts if the Revenue came and challenged your tax returns. That is how seriously they take these matters.

However, if you are the unlucky person who the Revenue challenged, it would still cause you a lot of aggro, even if the Trust company paid the barristers costs, etc.... But saying that, in the recent past, when the Revenue have made tax demands on certain contractors, they have been overturned or thrown out in the courts. It is at that point when the Revenue turn to 'statutory instruments' to make these schemes unworkable within immediate effect.

Anybody who knows about the 'Gilt Strip' schemes will know what I am talking about....

As long as you are aware that this could happen, then I can't see any reason why you can't use these schemes. They are perfectly legal.

Reply to
sylvian stone

Thinking back to Geoffrey Robinson et al I thought one of the key points was that you didn't have control over the trust, which does not seem to be the case here. I would also be worried about about the company running the trust going bust.

I thought IR35 was pretty much an optional tax anyway? I don't know any of my contractor friends who are paying it.

Reply to
davidof

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