2019 tax charge - consultation preparation

[DonkeyRhubarb]

Go to any big company (bank, telco), that uses contractors, and you won't find many who are genuinely self-employed.

[AtW]

Go to any big company (bank, telco), that uses contractors, and you won't find many who are genuinely self-employed.

But if they are outside IR35, then they are genuinely self-employed, right?

This might not be black and white, but there is clear difference between 80%+ genuine and 3-13% genuine, yet it's convenient for you to put them all into same bag and claim that either everybody innocent or everybody guilty.

[DonkeyRhubarb]

OK, have it your way.

Contractors using Limited companies do not avoid tax. Contractors using schemes are evil tax avoiding scum.

Now will you kindly leave us alone.

[centurian]

This probably won't earn me any fans, but I think Atw is raising some valid points. There's a tendency to jump on and argue the toss on the minutiae detail while forgetting the overarching point.

I know he's a troll-in-chief at times, but he does seem to be rather restrained on this occasion - at least for him anyway.

In particular, the reasoning of why HMRC are targeting schemes so hard while having less of a focus on LtdCo avoidance (and I don't agree with Atw on that - most LtdCo contractors are avoidance).

But the underlying points, particularly around the perceived amount of tax paid with schemes vs LtdCo - I think that's a plausible reason for why HMRC are hammering down hard.

Does any of that bring you closer to a solution - not really. But if you ask the question "why are HMRC going after schemes so hard" - well Atw is giving a tenable reason, however unpalatable it may be.

[DonkeyRhubarb]

In particular, the reasoning of why HMRC are targeting schemes so hard while having less of a focus on LtdCo avoidance (and I don't agree with Atw on that - most LtdCo contractors are avoidance).

But the underlying points, particularly around the perceived amount of tax paid with schemes vs LtdCo - I think that's a plausible reason for why HMRC are hammering down hard.

Does any of that bring you closer to a solution - not really. But if you ask the question "why are HMRC going after schemes so hard" - well Atw is giving a tenable reason, however unpalatable it may be.

Totally agree with everything you said.

Most schemes are more aggressive than Ltd Co avoidance. Partly that's because the promoters took a piece of the pie.

Schemes are also an easier target.

HMRC probably know that over 90% of Ltd Co contractors are avoiding tax but that doesn't help them. Unlike with the schemes, they'd have to deal with each individual contractor on a case by case basis, which is totally impractical.

I don't believe people who were in the loan schemes are in denial. They know they're probably screwed. It is just a question of whether it's worth fighting to try and salvage something.

[Fred Bloggs]

We saw with the ill fated "family business tax" what a hard time the government has attacking Ltd Co's in general. However, they have learned from this and the new dividend tax has gone totally unopposed in its introduction. It appears to be the perfect way to raise revenue from income while not breaking pledges around NIC and income tax rates.

[AtW]

However, they have learned from this and the new dividend tax has gone totally unopposed in its introduction. It appears to be the perfect way to raise revenue from income while not breaking pledges around NIC and income tax rates.

Yep, I don't think most people realise what change was made until they fill in their first return in 2018 and get a nasty surprise.

Give it a few years and they'll "simplify" things and make dividend tax rates the same as income tax, corp tax obviously won't drop down to zero, so in effect they'd collect employer NICs via corp tax (which is optional for big multinationals, so big donors of both parties are not affected). This is going to happen as it's the easiest way to deal with problem of low salaries/high dividends.

Would contractors stop using Ltds after that though? I doubt it, certainly not those who can still earn more money than being a permie, at least Ltd gives limited status protection, easily to administer etc

So, Govt knows that the tax burnen on small Ltds will increase, that's why it's imperative for them to deal with schemes by any means necessary. It's strange that the scheme makers did not take into account that these perpetual loans would be easy target for legislation change, I guess they just did not care - it's not them who'd be paying...

[QCApproved]

If the ratio of LTD Co Avoiders versus scheme Avoiders is 10-1 the fact that you are paying an ETR of 20% versus the scheme user paying 10-13% is irrelevant in terms of the absolute amount of tax avoided. There was always going to be a ceiling and decline on the number of people using schemes even when HMRC ignored them and took no action for years. This ceiling and decline occurred because it became clear IR35 was unenforceable and in any event most people wanted to retain absolute control over their revenue and distributions behind a corporate veil, schemes were not mortgage friendly etc and so forth. There was no risk of the majority moving off the limited company model. I can't imagine there were many sane individuals on the "0%" schemes you keep referring to, (if such a thing actually existed re contractor loans). I am not aware of any.

The gross fee to is not without tax impacts either - it paid the wages of admin staff here in the UK, and in most cases tax occurred offshore on the net fee to the actual scheme provider at some point - some of that does find its way back to the UK as the IOM and Guernsey contribute to the Treasury towards defence of the United Kingdom amongst other things. The part of the fee of the UK promoter was subject to corporation tax or partnership tax.
When you tot it all up there is not a huge gap on an individual basis either I suggest.

If HMRC could find an actionable way to attack LTD Co dividends they would extend you no quarter as some more desirable genre of avoider. It seems inevitable that the dividend tax will increase, luckily it seems unlikely it will be decided that increases (and any other changes to expenses etc) should apply retrospectively to when IR35 was "introduced"
I think the principal factor driving this the is ability to attack the avoidance and spin it well against a general framework of can we get away with this?

It's not driven by the scheme money avoided being more significant than money avoided elsewhere because I think the figures would show that the tax gap caused by individual contractors using ltd cos who should have been taxed under IR35, but were not, is the bigger sum and indeed will continue to grow subject to the above. I would expect HRMC to do this kind of analysis as part of its role in sub-analysing the tax gap. Some estimates would be good from them and I am happy to stand corrected by actual data. Likely they don't know how to go about making that estimate - it is the experience of many posters that's its most and that must be their feeling too, as they have been constantly under the IR35 bonnet trying to get the engine to fire and start collecting since 2000.

If you want to take some comfort from the attack on the schemes that it puts you in a better position because they were markedly more of an issue financially or somehow much more intolerable to HMRC I wouldn't take much.

If there is a ranking/spectrum of severity of avoidance that HMRC use then i think that should be disclosed on their website along with its methodology for the benefit of the taxpayer.
I think some taxpayers would further ask them have you effectively written off any tax avoided via a ltd co that should have been collected under IR35 from 2000 to the point at which ltd cos are taxed at PAYE parity and why retrospective attempts are not being made to quantify and recover that sum.

[AtW]

I can't imagine there were many sane individuals on the "0%" schemes you keep referring to, (if such a thing actually existed re contractor loans). I am not aware of any.

I don't have full info on all schemes (who does?), I am sure it's different, but the one I was referring to I believe is relevant for people on this forum, here is quote from BBC article:

"Tax at 3.5%

The case hinged on a tax avoidance scheme marketed by a firm of tax consultants in the Isle of Man called Montpelier.

They set up a complicated set of partnerships and trusts through which UK business contractors or consultants could channel their work to their customers, and also receive their income.

The fact that most of the income eventually came via a family trust meant that no income tax was paid on it, either in the UK or the Isle of Man.

The judge said that the overall effect had been to reduce Mr Huitson's tax rate to just 3.5%."

Source: BBC News - Offshore tax avoiders face £100m tax bill

3.5%, that's 0% basically. I am not sure if loans were involved in that particular scheme, but it's the example I've got reference form why would effective tax rate be much higher for the loans scheme, was it voluntary in hope to keep HMRC happy with 13%?

[AtW]

If HMRC could find an actionable way to attack LTD Co dividends they would extend you no quarter as some more desirable genre of avoider. It seems inevitable that the dividend tax will increase, luckily it seems unlikely it will be decided that increases (and any other changes to expenses etc) should apply retrospectively to when IR35 was "introduced"
I think the principal factor driving this the is ability to attack the avoidance and spin it well against a general framework of can we get away with this?

They'll certainly increase dividend tax, easy and covers a lot more people than just those who run their Ltds. That of course means that it now makes sense to receive dividends from offshore company that won't be paying corp tax as there is no tax credit for UK Ltds anymore, so they'll probably have even higher dividends tax rate for income from abroad where there is low corp tax!