Sanzar Partnership? New IOM company

[simondolan]

They are all much of a muchness, but at least some are being looked at by the Special Civil Investigations unit of the Revenue. We've got several clients who have come over to us from IOM schemes who are subject to investigation.

Hi,

Has anyone heard of The Sanzar Partnership or the Isle Of Man tax method that they offer?

It's a familiar theme but I can't find much about it. Essentially you are employed by Sanzar. You give them timesheets then they invoice your agency, the agency invoices your end client and the monies are paid back that way.

You are then paid minimum wage by Sanzar and the rest of the money is given to you as a share of the profits of Sanzar. Apparently this works because corporate tax for certain industries is 0% on IOM and so I guess Sanzar claims to be in one of those industries.

The important part is that they can just give you the money because of the Double Taxation Treaty between the United Kingdom and Isle of Man (1955), paragraph 3(2). This states that any tax paid on IOM is deemed paid in UK - therefore the 0% tax paid in IOM means you don't have to pay it again when it arrives in your account in the UK.

If you look at the treaty it mentions that in order to do this the business in the UK can't be a 'permanent establishment', of which the definition saus it 'does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf.'

This seems to look ok to me but I am still a little dubious, as they say it means you can keep 85% of the gross value of the contract, as supposed to 70-72% of a Ltd company after PI insurance and accountants fees...

Does anyone know anything about this? They claim to have run it by 'one of the UK's most eminent International Tax QCs'

Thanks,
Gehan

[IR35 Avoider]

...and this is where it seems to fall down. You're assuming that HMRC regard it as employment income - the reality is that for UK tax residents/domiciles, it doesn't matter whether it's UK employment income, Manx employment income, Manx Capital Gains, or whatever, it's still taxable in the hands of the individual in the UK whether or not it's (deemed to be) earned/gained here or overseas.

Actually in saying HMRC regard it as UK employment income I was only trying to illustrate how outrageous it looks to them, from an emotional point of view. I wasn't meaning to suggest such income was legally any different from any other type of taxable income.

Another thought for you: just because income is taxable in the UK doesn't mean HMRC can legally collect it from anyone. For example (and this is not what the above scheme is based on) an off-shore company might employ someone in the UK. Under UK law they are legally obliged to pay employers NI. They can refuse to pay, if they are non-resident in the UK, and HMRC can do nothing to them. Even if HMRC knew the password to their bank account, and they logged on to the companies account, with the companies consent, and just took the money, they would be violating a double-taxation agreement. i.e. HMRC would be violating one UK law (that enforces the treaty) in order to force compliance with the other. In other words, in this scenario, there is a contradiction between two UK laws and it is impossible for both to be complied with.

[meridian]

Another thought for you: just because income is taxable in the UK doesn't mean HMRC can legally collect it from anyone.

Quite. The don't collect it from just "anyone", they collect it from the taxable entity. Which is where Sanzar are being a bit cute - they're implying that because the "enterprise" (i.e. probably LLP) isn't taxable in the UK then any distribution of profits to the partners are also non-taxable to a UK individual. I suspect that HMRC would strongly disagree with this, and assess the individual who is, of course, in the UK.

For example (and this is not what the above scheme is based on) an off-shore company might employ someone in the UK. Under UK law they are legally obliged to pay employers NI. They can refuse to pay, if they are non-resident in the UK, and HMRC can do nothing to them..

Again, I believe that HMRC would disagree with you. Try here:
http://www.hmrc.gov.uk/manuals/senew/se11930.htm
"Where an employee works for someone in the UK but is employed and paid by an employer offshore the UK person has to operate PAYE."
You'd need to check the exact wording of the legislation, but it appears that ultimately it is the client in the UK who is liable for PAYE/NICs.


BTW, their assertion that simply by joining them also renders IR35 obsolete is also a bit of a laugh...

[ChimpMaster]

Well I joined them last week and now I am a billionaire.

[IR35 Avoider]

Quite. The don't collect it from just "anyone", they collect it from the taxable entity. Which is where Sanzar are being a bit cute - they're implying that because the "enterprise" (i.e. probably LLP) isn't taxable in the UK then any distribution of profits to the partners are also non-taxable to a UK individual. I suspect that HMRC would strongly disagree with this, and assess the individual who is, of course, in the UK.

No, it's much cleverer than that. The company are just pursuing a strategy which some lawyers say works and others say doesn't. No lawyer will say that what you've described above works.

HMRC say the scheme doesn't work and will pursue the individual for the tax.

[IR35 Avoider]

"Where an employee works for someone in the UK but is employed and paid by an employer offshore the UK person has to operate PAYE."
You'd need to check the exact wording of the legislation, but it appears that ultimately it is the client in the UK who is liable for PAYE/NICs.

I've mentioned this legislation before in these forums. HMRC will get the NI from the last UK company in the chain before the money goes off-shore, which could be the UK agency or even the client. That's why sensible agencies won't pay off-shore companies. The reason for this legislation is presumably precisely because HMRC can't get the money from the off-shore company. An off-shore scheme might have a UK front-end company (with no assets) to funnel the money off-shore, so that agencies will deal with it.

[IR35 Avoider]

BTW, their assertion that simply by joining them also renders IR35 obsolete is also a bit of a laugh...

The scheme claims to render the portion of income not taken as salary immune from tax. That's a far more astounding claim than that that IR35 doesn't apply. If that were true then the claim about IR35 would be true as well.

[meridian]

No, it's much cleverer than that. The company are just pursuing a strategy which some lawyers say works and others say doesn't. No lawyer will say that what you've described above works.

HMRC say the scheme doesn't work and will pursue the individual for the tax.

As nobody appears to be prepared to state exactly how the scheme works there doesn't appear to be much merit in discussing this particular scheme any further.

Your statement that "HMRC say the scheme doesn't work and will pursue the individual for the tax" says it all, really. Unless an individual is prepared to be the next Arctic and has the funds and professional backing to fight the Revenue then it doesn't seem worth it to be part of something on such a sticky wicket.

[meridian]

I've mentioned this legislation before in these forums. HMRC will get the NI from the last UK company in the chain before the money goes off-shore, which could be the UK agency or even the client. That's why sensible agencies won't pay off-shore companies. The reason for this legislation is presumably precisely because HMRC can't get the money from the off-shore company. An off-shore scheme might have a UK front-end company (with no assets) to funnel the money off-shore, so that agencies will deal with it.

But that leaves the UK company liable for NICs and open to HMRC. It'll only take a couple of instances of default before HMRC get a bit peeved and get the DTI to ban whoever has lent their names as company directors, not to mention pursued personally for deliberately defrauding/defaulting.

[meridian]

The scheme claims to render the portion of income not taken as salary immune from tax. That's a far more astounding claim than that that IR35 doesn't apply. If that were true then the claim about IR35 would be true as well.

Nope, disagree again. IR35 is a personal tax - HMRC will look at the end contract and working conditions between the UK resident and the UK client, and if necessary assess tax directly to the UK resident, regardless of the intermediaries involved.

Quote from http://www.hmrc.gov.uk/ir35/:
"The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, such as a service company or a partnership, the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay."
My emphases.