Reply to: "We weren’t trying to avoid tax – but now our lives are in ruins"

[ukcommando]

I feel bad for those who thought it was legit. Wondering why HMRC allow it to happen if it was illegal? If HMRC warned about these schemes earlier, I am sure at least 50% wouldn't have got involved in the first place.

I think it's important to also consider that (in hindsight) these schemes seemed to take off in the 2000's, so effectively in the years after IR35 first raised it's ugly head. So one driver for folk joining them was almost certainly avoiding the fear that IR35 introduced to the market.

[ukcommando]

That's rather the key point - and was highlighted at the time. While the return may have looked similar (it wasn't, the best a Ltd Co can hope for is about 73% unless you are doing something "imaginative", against 80-85% for the schemes) the remainder of the gross income was not going to HMRC, it was going to your provider and HMRC were getting little or nothing.

And that disappearing tax is your problem, because we have a self assessment system. It would not have been too hard (and still isn't, come to that) to spot the elephant in the room for anything that pretends to be better than legal income.

As I said earlier, the punishment is harsh and extreme, but the blame for getting it is easily attributable.

I don't disagree. As I say, personal circumstance meant that my perspective was completely out of character. My frustration is not so much about making the original mistake but the ongoing feeling of being caught in the schemes in the utterly daft hope that they provided the legal defence and protection. For me, at least, it's an interesting lesson in how even the most normally level headed person's perspective can be skewed by circumstance. Interestingly, over the years I've spoken to a lot of folk who were in the original schemes and also say how they felt trapped, whilst digging themselves an even deeper hole, so I know I'm far from alone there. BTW, your estimation of the difference in percentages is wider than was the case for me, I worked away from home and legitimate expenses were significant, plus the scheme I initially joined was at the modest end of the scale. At the time I calculated around 3 to 4 % difference in what ended up in my own bank account.

[malvolio]

Not dissimilar to my own case. When I joined a scheme in around 2005, the promised returns were only a few percent higher than my limited company provided (with legitimate expense claims). ....

That's rather the key point - and was highlighted at the time. While the return may have looked similar (it wasn't, the best a Ltd Co can hope for is about 73% unless you are doing something "imaginative", against 80-85% for the schemes) the remainder of the gross income was not going to HMRC, it was going to your provider and HMRC were getting little or nothing.

And that disappearing tax is your problem, because we have a self assessment system. It would not have been too hard (and still isn't, come to that) to spot the elephant in the room for anything that pretends to be better than legal income.

As I said earlier, the punishment is harsh and extreme, but the blame for getting it is easily attributable.

[ukcommando]

When you consider how unsettled the law was ( 2010 was arguably when the first clear and legislative statement was made ) I'm not sure credulity comes into it. When something is mass-marketed it tends to have gravitas if not challenged quickly and with prejudice.

As for tax avoidance, it depends on a lot. When I was involved in the early 2000s the comparator was a scheme ( approx 80% return to the user depending) or Ltd Co ( approx 80% return to the user depending ). So there was no real incentive there. Now compare it to being inside IR35 and it does become more incentivised. HMRC said at one point 80% of those who were in the one-man Ltd Co group should have been classed as inside IR35 so they were avoiding tax too.

It's a strange game that is being played with obtuse and flexible rules and judgements. For me, as a then first time accidental contractor I tended to the scheme because it was less friction more than anything else. I did as much due diligence as my knowledge allowed. There wasn't the wealth of information out there in 2001 to offer a sufficient warning.

Not dissimilar to my own case. When I joined a scheme in around 2005, the promised returns were only a few percent higher than my limited company provided (with legitimate expense claims). I had a marriage firmly on the downward slope, and the scheme provided what appeared a simple way to cut my (soon to be ex) wife out of my personal finance (she was my Company Secretary as is common). Saving lots of tax was not the main driver. In hindsight, the "normal" me, prior to my marriage starting to break down, would never have even looked at anything outside the normal ltd company approach. C'est la vie. By the time I got divorced a few years later, I was in a decent contract, and the first alarm bells I was personally aware of were in 2010. Like many, I think, I was then caught in the inside/outside scenario with a fear that leaving the scheme meant I lost their support in arguing the case (they still claimed to have QC opinion that the scheme was legit). The reality is that having survived a divorce fairly intact, and looking to a brighter future, the crisis that then arose from my mistake in ever joining a scheme, caused far worse stress than my divorce! It completely threw me, paralysing my ability to think straight (completely out of character for me) and hit the better earning levels that I'm capable of. The psychological impact has been significant. But I also recognise that there are many who were substantially worse impacted than myself. I feel a never subsiding sense of anger that HMRC were almost wholly ineffective in dealing with the schemes, just watching folk sink further into their level of exposure.

[woody1]

Good question. But if ATO ever got involved, I wouldn't fancy their chances of getting away with it. ATO can make an encounter with a White Shark look like a good option. While I was working in Oz I was scrupulous to stay 100% legal. For one thing, everyone is Oz has to do a tax return every year. Compulsory. The system is very well organised at maximum revenue collection.

Whether the ATO would be as motivated to collect on behalf of HMRC is another matter, especially if the tax in dispute dates back to the early 2000s. If HMRC have left it too long, it might even be time barred.

[Fred Bloggs]

I've just reread that 2005 thread - I wonder if the tax authorities ever caught up with those Aussies or if they did a runner and managed to slip the net? Highly likely given the general competence of HMRC.

Good question. But if ATO ever got involved, I wouldn't fancy their chances of getting away with it. ATO can make an encounter with a White Shark look like a good option. While I was working in Oz I was scrupulous to stay 100% legal. For one thing, everyone is Oz has to do a tax return every year. Compulsory. The system is very well organised at maximum revenue collection.

[Dactylion]

I'm not doubting that many caught were "innocent" (albeit naive?)* but very early in my contracting career I worked with several more experienced contractors who continuously encouraged me towards various "great things" (IoM Registered Companies etc) where you "didn't have to pay any Tax"

They were basically bragging about how they were "not having to pay any Tax" (no attempt to distinguish between Avoidance or Evasion..... )

I don't have any recollections of any of them "doing it" who honestly thought it was 100% kosher.

I don't know how many if any are now caught up in this - nor how many of them are pleading innocence/naivety.

*Is there a sarcasm emoji?

[cojak]

I've just reread that 2005 thread - I wonder if the tax authorities ever caught up with those Aussies or if they did a runner and managed to slip the net? Highly likely given the general competence of HMRC.

[malvolio]

FWIW, the sales blurbs I saw back in the 2000s made claims like "QC approved" etc. I doubt firms would have advertised this if the opinions didn't support the validity of the arrangements.

I wonder if any of the schemes still being sold now are backed by an opinion? You'd have to be a pretty dodgy KC to provide any form of endorsement these days.

They may have approved the structure as being legitimate. They probably didn't approve, or more likely weren't asked to approve, whether or not they were open to use by a non-qualifying person. As I said, film production tax reliefs for one example are entirely legal - for the right purpose.

[GregRickshaw]

And we all know just who 'that QC' was!

[woody1]

And, just as an aside, many of these companies said they had a QC's opinion on their viability. They never ever actually said what that opinion was...

FWIW, the sales blurbs I saw back in the 2000s made claims like "QC approved" etc. I doubt firms would have advertised this if the opinions didn't support the validity of the arrangements.

I wonder if any of the schemes still being sold now are backed by an opinion? You'd have to be a pretty dodgy KC to provide any form of endorsement these days.

[malvolio]

Again, I left them in 2005. The scheme I was in was a payroll scheme run by an accounting firm that had been around decades. I was forced into contracting in the dotcom bust. My brother who worked as an senior accountantant/auditor in a big city firm didn't flag anything ( he even was in the same class as the QC who lent his opinion to the scheme ).

So there is a mix, but anything that isn't clearly flagged ( not in these forums or on HMRC spotlights ) will not be noticed by anyone who is unused to the contract environment. This is also why the schemes have kept going after the loan charge. First time contractors or agency workers will likely not know what they are being payed other than the bottom line.

Well that's rather the thesis, isn't it.

It is not all that hard to work out that the minimum tax rate on income is (now) 20% so no matter how it winds up in your personal bank account, somewhere around that amount has got to be paid to HMRC. If you're getting 85% or so of your gross as personal income and also paying 5% or more of your gross to your "payroll provider" then clearly something is badly wrong. That was all that we were saying in the 2000's.

Go a bit deeper into how these things were working and it rapidly became clear that something like a motor trader allowance for stock holding is perfectly legitimate - but only if you are in the business of buying an selling cars. Writing code doesn't really qualify.

Similarly with EBTs, they are a perfectly sensible way to stop double taxation on pensions paid for out of already taxed income, but they are not applicable to pre-tax income.

Similarly with IoM double taxation treaties; yes the IoM taxation level was zero percent, but you weren't earning your money in the IoM, you were earning it in the UK where it is clearly liable for UK taxation.

There were degrees of naivety at work, but at the end of the day, the numbers just don't add up. We as a group are fairly intelligent and should be capable of recognising the absolute stupidity of using a scheme that promised unlikely levels of return on gross. But first you have to look at what is on offer and not simply accept that five magic beans are a viable option.

And, just as an aside, many of these companies said they had a QC's opinion on their viability. They never ever actually said what that opinion was...

[dammit chloe]

I saved a few pages of links BITD when I, Mal and a few others were warning people to steer clear. The earliest warning I’ve got from Mal was in 2005…

it was 2013 when we started getting flooded with cries for help, which is when I asked Admin to set up the HMRC Enquires sub-forum. I was initially unsympathetic but there were so many and they needed help, not censure so I changed my position on it.

Again, I left them in 2005. The scheme I was in was a payroll scheme run by an accounting firm that had been around decades. I was forced into contracting in the dotcom bust. My brother who worked as an senior accountantant/auditor in a big city firm didn't flag anything ( he even was in the same class as the QC who lent his opinion to the scheme ).

So there is a mix, but anything that isn't clearly flagged ( not in these forums or on HMRC spotlights ) will not be noticed by anyone who is unused to the contract environment. This is also why the schemes have kept going after the loan charge. First time contractors or agency workers will likely not know what they are being payed other than the bottom line.

[dammit chloe]

I have limited sympathy im afraid, I knew about these schemes and always thought they were dodgy and avoided them, I was earning enough by dividends/salary, it's obvious HMRC aren't going to let you only pay 5% tax A 5 minute google search could have revealed the risks involved.

Now. Not back in the early 2000s. There was no info. I know, I looked.
Were you inside or outside IR35? Have you avoided a lot of tax just because HMRC didn't get round to investigating. Because that is what this is all about. AS I have said HMRC reckon 80% of contractors should have been paying full PAYE.

[cojak]

Yeah, I agree. But around 2008 or so when there were some lively debates on here about the schemes of various flavours and clear cases such as BN66 aka Padmore vs HMRC, those who were saying (a) "They don't work", (b) "It will come back to bite you" (e.g. through your eventual IHT bill) or (c) "You're a company director, why don't you understand the rules?" were routinely abused for daring to question the wisdom or abilities of those who are now the victims. Like many others, my sympathies are with the harshness of the penalty regime but not with getting yourself into that position in the first place.

I saved a few pages of links BITD when I, Mal and a few others were warning people to steer clear. The earliest warning I’ve got from Mal was in 2005…

it was 2013 when we started getting flooded with cries for help, which is when I asked Admin to set up the HMRC Enquires sub-forum. I was initially unsympathetic but there were so many and they needed help, not censure so I changed my position on it.