Offshore Companies to decrease tax for contractors?!

[moneyfactz]

There seems to be two approaches to this from different companies. I would really like to hear from anyone using these.

One is a Channel island company where you work as direct employee, get paid a proportion of you fee via a salary, and the rest is given you as an interest free loan, which is declared as a benefit in kind and you pay interest of 5%. This should mean you get around 75% benefit from your contract fees.

The second is another offshore island with a tax treaty with the Uk. You sign a contract for services for say £20k which is taxed, the rest is via a trust which you are beneficary, as you pay 0% tax offshore you do not have to pay it when it is paid into your bank account in the UK under the double-tax treaty. This yields around 85% of your contract fees.

I would really like to get some opinons on this, especially if you are using similiar schemes and got past a tax return!

If you feel the urge to post "if something sounds to good to be true, then it probably is", then please feel free to go and boil your head and not annoy me! >:

[Darren at 1st Accountancy Serv Ltd]

Offshoring

The schemes sound interesting and have been used for saving tax in the past....many footballers use similar schemes today.

However, anti avoidance legislation looks to have reduced the flow of these type of schemes and you'll have to advise the IR of the scheme. :rolleyes

They sound appealing and Offshore Companies have their uses but in the case of an IT Contractor would not like to argue the case with the IR during an enquiry given the current climate.

[ASB]

As Darren said you might have a hard time arguing the toss with the IR but there are a couple of other point to consider:-

In the case of a loan how does it get repaid? There is risk of you being chased for repayment.

Even if you do get it through an IR enquiry - and it's only then that you truly know it works your IR35 status could potentially become relevant. The provisions in the legislation apply IR35 to income that could reasonably be taken to be remuneration for a contract.

It is just possible that a particularly zealous inspector, if he fails to get assessment under the trust rules or similar might try IR35 option.

If you do go for it another problem you may face is getting somebody to accept invoices from a CI company or one in your favourite tax haven.

[moneyfactz]

Thanks for the responses.

The loan one does worry me as some of it is retained, and if you ever leave, you have to pay back what you borrowed and they then loan it to you again as an ex-employee which is outside of benefits in kind and gets no tax!

I am told that a UK Agency will invoice my Agency and then offshore the money so hopefully this should get over the invoicing issue you mention.

Got any better alternatives!

[ASB]

Chain

So the offshore entity has a UK branch invoicing on it's behalf and the remitting those funds to the offshore entity against invoices raised by that entiry for contracts it has with individuals in the UK.

That gives the taxman another completely different avenue of attack where he could raise all sorts of interesting arguments. If he wins any of them it likely you that foots the bill.

I can't see any advantages to it myself, unless you are planning to get to be non resident.

[IR35 Avoider]

Re: Chain

The offshore trust method is known to the IR and they say it doesn't work.

The people running it know the IR say that, and (presumably) think they can win in court. Contractors using it were first investigated a couple of years ago, so it would be interesting to know what the outcome of those cases was.

In the budget there was a section that specifically aimed at closing down tax-avoidance schemes that use double-taxation relief. Don't know how that affects things.

[IR35 Avoider]

Re: Chain

Of the two, I think the trust scheme is the one I would go for if I was feeling brave. What I'm actually going to do though is wait for next year, then pay myself 5K salary and the rest into a pension scheme and pay no immediate tax or NI at all.

[ASB]

Offshore Trust

I am pretty convinced that offshore trusts do [or did] work. Why else would the finance act have been amended to alter the way relief could be obtained on payments into them?

Also with the recent scheme collapsed why did IR not go after the individuals who had loanback arrangements from there?

Regarding pension approach, if you are 50 or approaching it check out immediate vesting. Can be a good way of getting money out for current needs.

[Coming to UK]

Re: Offshore Trust

I was as well offered two solution where

a) being employed by UK ltd. and being paid by loans from an offshore EBT
b) being employed offshore (Channel islands) and receiving a minimum salary in the UK (PAYE). The rest would be paid as well based on loans through EBT.
Moving myself for the first time to the UK and having the intention to just stay for a year or two, I was told this would work since I am only a non-domiciled resident in the UK.
Anyone how has recent experiences with this kind of schemas (especially with the IR in the UK?)

[Bradley]

Re:Offshore Trust

In the 2004 Pre-Budget Report Red Dawn said that she would backdate any legislation covering employee related tax avoidance to 2nd December 2004.

This means that offshore trusts, EBTs etc etc will not work at all in the future unless there is some sound commercial justification for rewarding employees in this way.

These avoidance schemes you talk about cannot be justified commercially. It's avoidance pure and simple.