IR35 vs Tax Schemes

[malvolio]

Yep, that's the one! Why do you say it's ill informed?

What is says about the schemes isn't particualrly accurate. there are many totally legitmate ones out there, but htey are primarily aimed at high net worth investors like pension funds. Our friends with the 85% schemes are merely hanging on the back of them and selling them to a different market, but the underlying schemes are perfetly fine and well managed. That's why they're so difficult to attack.

There are still risks, though. The scheme administrators you use may not be 100% kosher. If they do disappear you won't have a cat in hell's chance of gtting your money back. Joining a scheme now is a much higher risk since HMRC they should not be used by individuals since they represent unaceptable avoidance, have said they intend closing them down (but not how) and are unlikely to look kindly on people starting to use them (whic his why I said that if you're already in one the risks is pretty much zero).

However the kicker is that the tax is still due, when you leave the scheme or from your estate. Either option could prove quite embarassingly expensive. You can avoid that by declaring your "loan" income as real income of course, but then you're paying someone 15% of your gross so you can be taxed at employee levels on all of it; possibly why the scheme providers don't mention that option...

So the risks are significant, but not for the reasons given n that article.

[BlasterBates]

Members of loan schemes have been informed that they're under investigation eg:

http://forums.contractoruk.com/accou...ml#post1448348

If you have a loan outstanding this could become the target of potential new legislation if HMRC can't attack it directly; and any new tax on loans wouldn't have to be retrospective.

i.e. you're outstanding loan could become a longterm worry.

[Subsignal]

Members of loan schemes have been informed that they're under investigation eg:

http://forums.contractoruk.com/accou...ml#post1448348

If you have a loan outstanding this could become the target of potential new legislation if HMRC can't attack it directly; and any new tax on loans wouldn't have to be retrospective.

i.e. you're outstanding loan could become a longterm worry.

Sorry if I'm being a bit of a simpleton or missing the point, but you mention a "new tax on loans" - surely the revenue can't tax an outstanding loan? Almost the whole UK population have an outstanding loan of one form or another!

[malvolio]

Sorry if I'm being a bit of a simpleton or missing the point, but you mention a "new tax on loans" - surely the revenue can't tax an outstanding loan? Almost the whole UK population have an outstanding loan of one form or another!

They can already tax you on the actual benefit to you of having a loan that you can treat as income, even if legally it isn't earned income. A small change to the wording of the two boxes on the SAR that cover loaned amounts would suffice, and they already know who are receiving such loans.

Stick with a LtdCo. When you do the sums, you aren't even losing very much net income and won't lose your house if (when) it goes wrong.

[BlasterBates]

Sorry if I'm being a bit of a simpleton or missing the point, but you mention a "new tax on loans" - surely the revenue can't tax an outstanding loan? Almost the whole UK population have an outstanding loan of one form or another!

No they're not going to tax loans per se, they would target loans from benefit trusts used for the specific purpoes of avoiding tax. So you can imagine a wording in the law that would rule if the loan was from a Trust, interest free open ended for example then that would be taxable.

I'm just pointing out that as an example of what may happen and the sort of thing you may want to think about. If you do go into a scheme be prepared to go bankrupt when it all goes pear shaped.

When you have to explain to your wife in a few years time that you've lost everything, in the end you only would have yourself to blame, because that is the risk you took. If you go Ltd you'll never face bankruptcy as a result of unpaid tax, or at least it is highly unlikely. A bit like going into the army and having your legs blown off, you can of course blame the enemy but you knew that might happen when you joined the army.

So by all means go into the scheme but be aware of what might happen.

[Subsignal]

No they're not going to tax loans per se, they would target loans from benefit trusts used for the specific purpoes of avoiding tax. So you can imagine a wording in the law that would rule if the loan was from a Trust, interest free open ended for example then that would be taxable.

I'm just pointing out that as an example of what may happen and the sort of thing you may want to think about. If you do go into a scheme be prepared to go bankrupt when it all goes pear shaped.

When you have to explain to your wife in a few years time that you've lost everything, in the end you only would have yourself to blame, because that is the risk you took. If you go Ltd you'll never face bankruptcy as a result of unpaid tax, or at least it is highly unlikely. A bit like going into the army and having your legs blown off, you can of course blame the enemy but you knew that might happen when you joined the army.

So by all means go into the scheme but be aware of what might happen.

Thanks a lot for the advice but I have no intention of entering a scheme!

As I mentioned earlier I'm just curious as to why there seems to be such negativity to schemes when there appears to be as many risks with a Ltd Company (IR35) or the risk of any type of provider going under (or doing a runner with your money). Although retrospective action by the Revenue is often cited as a risk for not joining a scheme, surely this supposed "retropsective" avenue would have been applied by the Revenue to the EBT schemes recently closed down. Rather than that, it appears that the EBT scheme providers have simply followed the new rules and opened up new schemes after finding loopholes in the latest legislation. Which surely must, to some extent, show that it's not that risky joining a scheme as long as it is robust and provided by a company with a "good" track record.

[malvolio]

Thanks a lot for the advice but I have no intention of entering a scheme!

As I mentioned earlier I'm just curious as to why there seems to be such negativity to schemes when there appears to be as many risks with a Ltd Company (IR35) or the risk of any type of provider going under (or doing a runner with your money). Although retrospective action by the Revenue is often cited as a risk for not joining a scheme, surely this supposed "retropsective" avenue would have been applied by the Revenue to the EBT schemes recently closed down. Rather than that, it appears that the EBT scheme providers have simply followed the new rules and opened up new schemes after finding loopholes in the latest legislation. Which surely must, to some extent, show that it's not that risky joining a scheme as long as it is robust and provided by a company with a "good" track record.

IR35 is a manageable and insurable risk. UK-based agencies going bust is a manageable and insurable risk. Neither are likely to change significantly in the coming years. Offhsore-based schemes are neither insurable nor manageable, and are likely to change at random as and when HMRC get around to them. Joining one now would be stupid, only becuase HMRC has made it very clear that as of now they consider them to be unacceptable avoidance. If you're already in one, that's a different problem, but you can't join one retrospectively and doing so now will raise a big red flag over your bank account.

Yes, scheme providers will continue to find new loopholes or they lose their business, but that does not change the risk profile in the slightest.

Incidentally the law hasn't changed. All HMRC have done is make the income from certain sources liable to PAYE and NICs as earned income. They can do the same with anything else they need to by amending regulations, not laws.


As for retrospection, despite what Montpelier seems to show, that is not an option; new legislation simply cannot be backdated. The best they can do is say they will legislate with effect from todays date, which is what they did with EBTs and MSCs and may well do with loan-based income.

[DonkeyRhubarb]

As for retrospection, despite what Montpelier seems to show, that is not an option; new legislation simply cannot be backdated. The best they can do is say they will legislate with effect from todays date, which is what they did with EBTs and MSCs and may well do with loan-based income.

That is simply not true. BN66 was not the only retrospective anti-avoidance legislation introduced by Labour. It was by far the most extreme example but I can give you two other instances where legislation was backdated prior to its announcement.

The bottom line is Parliament can do pretty much whatever it likes. If HMRC asks for a new retrospective law and the Government agrees, and Parliaments enacts it then there's not a lot anyone can do about it.

The only things which trump Parliamentary supremacy is the Human Rights Act and the European Treaty, both of which are being contested in the BN66 case (Huitson -v- HMRC and Shiner -v- HMRC).

[Subsignal]

IR35 is a manageable and insurable risk. UK-based agencies going bust is a manageable and insurable risk. Neither are likely to change significantly in the coming years. Offhsore-based schemes are neither insurable nor manageable, and are likely to change at random as and when HMRC get around to them. Joining one now would be stupid, only becuase HMRC has made it very clear that as of now they consider them to be unacceptable avoidance. If you're already in one, that's a different problem, but you can't join one retrospectively and doing so now will raise a big red flag over your bank account.

Yes, scheme providers will continue to find new loopholes or they lose their business, but that does not change the risk profile in the slightest.

Incidentally the law hasn't changed. All HMRC have done is make the income from certain sources liable to PAYE and NICs as earned income. They can do the same with anything else they need to by amending regulations, not laws.


As for retrospection, despite what Montpelier seems to show, that is not an option; new legislation simply cannot be backdated. The best they can do is say they will legislate with effect from todays date, which is what they did with EBTs and MSCs and may well do with loan-based income.

Thanks very much for your reply - its nice to have a balanced and informed opinion!

The only point I would raise, is the one you make regarding the fact that "as of now they (HMRC) consider them to be unacceptable avoidance" - surely they have always considered schemes to be unacceptable avoidance! The only difference is, that now they have their "spotlights", the media attention and their new habit of not distinguishing between avoidance and evasion. I'm sure they would use any means to discourage individuals from entering a scheme because I doubt they've ever been happy about anyone joining one!

[DonkeyRhubarb]

Incidentally the law hasn't changed. All HMRC have done is make the income from certain sources liable to PAYE and NICs as earned income. They can do the same with anything else they need to by amending regulations, not laws.

I don't agree with this either.

HMRC can't amend regulations in the way you suggest, making certain income liable to PAYE and NIC.

They can either ask a Court to decide if some existing piece of legislation applies or they can ask the Government to introduce a provision/measure in a Finance Bill.

Anything that ends up in a Finance Act, enacted by Parliament, is a new law.

BN66, as in Section 58 Finance Act 2008, was a new law.