The Practical Guide to Limited Company Tax
If you have chosen to operate your business as a limited com...
By Lynne Gowers on 12th August 2016
Benjamin Franklin famously said “Nothing is certain, except death and taxes”. It’s human nature to want to put both these off as far as possible!
It goes without saying that advertised schemes offering contractors the opportunity to hold on to up to 90% of their income are going to be tempting. But as with much in life, if something seems too good to be true, it probably is.
There are some variations to the model and terminology used, but all have one thing in common – they use loans to reduce the tax that the contractor pays. Instead of being paid directly to the contractor, subject to normal taxation, the income is diverted through a chain of companies or trusts, which make a loan to the contractor. They will normally be paid a small salary to cover off the personal tax allowance, with the rest paid as a loan.
In theory, the contractor is being provided with the use of the money tax-free – hence the heavily promoted tax savings.
HMRC is absolutely clear on this. The “loans” are not really loans at all; they are never repayable and the contractor uses the money as if it were his or her own. The sole purpose of the arrangement is to avoid tax.
In September 2015, HMRC published Spotlight 26, in which they highlighted the warning signs to look out for if you are offered a remuneration scheme which seems too good to be true:
Don’t take their word for it – take independent advice on legitimate ways to maximise your take home pay.
HMRC will NEVER approve such schemes and regards them as tax avoidance. They will challenge the scheme and recover correct tax from users.
Scheme promoters are sure to roll out this line but again it is false. Contractor loan schemes must be declared under the Disclosure of Tax Avoidance Schemes legislation. The scheme promoter is required to give the scheme reference number (SRN) to all users, which must then be included on their tax return. Incorrect or non-disclosure will result in penalty charges.
HMRC will investigate both disclosed and undisclosed schemes and will seek to recover tax, interest and penalties on money received in the form of contractor loans.
Your accountant will be able to advise you in the first instance, but you need to contact HMRC. It is always better to knock on their door, with genuine intentions, rather than wait for them to knock on yours.
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