Spotlight 53 with the catchy title, ‘Disguised remuneration: tax avoidance using capital advances, joint and mutual share ownership agreements’ has been published by HMRC in an attempt to ward off individuals participating in schemes that avoid Income Tax and NIC via a cocktail of capital advances and complex offshore joint (or mutual) share ownership arrangements.
Spotlight 53 disguised remuneration scheme
Under these schemes, the contractor becomes an employee of an umbrella company or a connected entity, such as an offshore company. The contractor then signs a:
- Loan or capital advance agreement; and
- Joint/mutual share ownership agreement
Remuneration is paid through two separate payments, on a weekly or monthly basis:
- Nominal salary attracting little or no tax and NIC; and
- Weekly/monthly loans termed ‘capital advances’.
The employer company then executes various share transactions involving an offshore joint/mutual share ownership trust which conveniently results in no financial gain to the employee. These shares may also give rise to dividends for the employee. The contractor has no direct involvement in the share transactions but receives monthly or annual summaries that show their outstanding loans having been repaid by way of capital gains and dividends.
Spotlight 53 warning
HMRC says that this is an attempt to ‘dress up’ employment income in a different manner so as to avoid PAYE, Income Tax and NIC. Needless to say, the department does not approve of these schemes and they will wage war on the promoters, enablers and users alike.
Someone involved in one of these types of scheme will be liable for the tax and NIC on the value of the loans received, interest and penalties and, for transactions post 14th September 2016, a General Anti-Abuse Rule (GAAR) penalty of 60% but only where the GAAR applies. HMRC’s advice to those people is to get out now and settle with them so as to avoid a future investigation and increased liabilities.
How contactors can spot disguised remuneration scheme floggers
HMRC provides some guidance as to how unsuspecting contractors can smell a rat.
It sounds too good to be true
It probably is. Some schemes promise to lower your tax bill for little or no real cost. They will say you do not have to do much more than paying the scheme promoter and sign some papers.
Pay in the form of loans
Some contractor loan schemes involve giving you some or all of your payment in the form of a loan that you’re not expected to pay back. It’s diverted through a chain of companies, trusts or partnerships and you’ll be told this is to save you tax.
The benefits of the scheme seem out of proportion to the money being generated or the cost of the scheme to you. The scheme promoter will claim there’s very little risk to your investment.
Round in circles
The scheme involves money going around in a circle back to where it started, or some similar artificial arrangement.
HMRC has given it a Scheme Reference Number
This is where HMRC has identified the arrangement as having the hallmarks of tax avoidance and are investigating it. You will have been given a Scheme Reference Number (SRN) by your promoter and will have included it on your tax return. Having an SRN does not mean that HMRC has ‘approved’ the scheme. HMRC does not approve any tax avoidance schemes.
Schemes HMRC has concerns about
Tax avoidance schemes that HMRC are scrutinising can be found on the ‘Spotlights’ page of their website. Even if a scheme is not mentioned, it will still be challenged by HMRC.
Never sign up for any type of tax avoidance scheme without taking independent professional advice first. It may be expensive but it could save you a lot more money and let you sleep soundly in the long run.
Additional notes for contactors
If you’re concerned about IR35, we offer a range of contract reviews with comprehensive advice on how to stay outside the legislation. We also offer IR35 Tax Investigation & Liabilities insurance (TILI), which includes tribunal defence from our resident tax and IR35 expert Andy Vessey ATT as part of the policy. Andy is also available for IR35 training, conferences and specialist commentary on the off-payroll rules. Please get in touch.
You can also read more about IR35 and what you can do to minimise your investigation risk here.