Tax avoidance schemes come in all shapes and sizes. To veteran contractors, the warning signs may be obvious, but many others are (or have been) duped into using them. They represent a clear and present danger to your current and future prosperity.
Aside from traditional employment (or working for an agency via PAYE), there are only two legitimate business structures you can use as a contractor in the UK: your own limited company, or a PAYE umbrella company.
In recent years, a variety of tax avoidance vehicles, masquerading as ‘umbrella schemes’ or similar, have targeted contractors and other types of workers, offering wildly high rates of net take-home pay.
Clearly, if something appears to be too good to be true, it probably is. In this article, we look at the key warning signs of tax avoidance schemes.
Unusual methods of processing payroll
Disguised remuneration is a type of tax avoidance arrangement that involves processing the payroll of temporary workers with uncommon practices to help them avoid tax and National Insurance. Here are just some of the most common types of disguised remuneration schemes:
- Loan schemes – the government has put a vast number of loan schemes in the spotlight. These schemes work by paying workers a small taxable salary and the rest via a loan (typically offshore) that is never paid back, in practice.
- Job board arrangements – a very unusual type of disguised remuneration scheme that involves paying workers with a combination of low salary and job board credits. The job board credits are instantly transferred into cash, meaning tax hasn’t been paid and the worker retains more of their money.
- Share schemes – Some loan arrangements offer to pay workers with low salaries and shares in a business – usually located offshore. The shares are almost immediately exchanged for cash, resulting in the worker paying less tax and retaining more money.
It is worth noting that some tax avoidance schemes market themselves as being compliant umbrella companies. Compliant umbrella companies only operate via PAYE and would never advertise or promote tax avoidance arrangements.
Most (but not all) tax avoidance schemes are located outside of the UK in well-known tax havens. These include the Isle of Man, the Channel Islands, Cayman Islands, East-Asia, and South America. If you are a UK taxpayer, it is sensible to assume your payroll provider should be UK-based as well. An offshore address is a major warning sign.
Tax avoidance vehicles (including disguised remuneration models) target temporary workers and boast massive take-home-pay percentages (often 80% or more).
Although such claims should make most of us run for the hills, this hasn’t stopped thousands of contractors and freelancers from trying their luck with dodgy tax avoidance schemes.
Be in no doubt, many such schemes target temporary workers, and many of their clients are unaware that they are breaking UK tax laws – until HMRC starts investigating their tax affairs.
Fake landing pages
A few years ago, all you had to do was type in “maximise pay as a contractor” into Google, and the results page would present you with dozens of unethical tax avoidance schemes. However, many of these appear to have disappeared – to Google’s credit. They are still out there, and you must be aware of them.
The websites owned by tax avoidance schemes make all kinds of bold, unrealistic claims. Therefore, when you are on a payroll provider’s website, have a thorough browse and look out for the following signs of a tax avoidance scheme. Some websites are clearly dodgy from the offset. However, others are far more convincing.
Bold claims about reducing tax
Almost every tax avoidance scheme will advertise they can help you retain more money by paying less tax. Compliant umbrella companies will never offer to help you reduce your tax and NI liability. They will also clarify that they operate Pay As You Earn (PAYE) – HMRC’s tax system.
They often claim to work with some of the world’s biggest companies
A lot of tax avoidance schemes will create websites that lie. One tactic used by the companies behind these websites is to pretend they work with some of the world’s largest organisations, including Shell, Microsoft and Apple. In reality, these claims are false and are made to try and encourage clients to sign up.
Fake ‘government-approved’ claims
Another unacceptable tactic used by tax avoidance schemes is to claim their businesses are “approved by the UK government”. Umbrella companies are not regulated by the government and HMRC does not approve or endorse any individual payroll providers.
Contacting them isn’t easy
The criminals behind tax avoidance schemes can be extremely difficult to get in contact with. Usually, this is because they do not want to be contacted at all and they prefer to hide behind a dodgy landing page or online advertisement. From experience, many online tax avoidance schemes have a generic phone number, contact form, and online chat feature. In reality, it’s extremely difficult to speak to a representative, and most of the communication is done via email.
Loads of glowing testimonials that all say the same thing (usually high pay related)
Fake testimonials are a great way to try and trick viewers into believing a website is legitimate when it’s not. The best way to check the reviews of a payroll company is to look at trusted review platforms such as Google and Trustpilot.
They don’t have a legitimate and respected professional accreditation
While the government doesn’t regulate the umbrella company itself, the FCSA and Professional Passport provide accreditations that demonstrate that a business has been professionally audited, and is compliant with UK tax law.
A common sign of a tax avoidance scheme is when you must sign multiple contracts with one provider. This should never be the case. If you receive more than one contract, query the provider and determine what’s going on.
If you use a non-compliant umbrella company, there is a high possibility you will not be issued a payslip at all. And, if you are issued a payslip, it’s unlikely to include the usual PAYE deductions that compliant umbrella companies adhere to.
Uneducated IR35 references and claims to be IR35 specialists
In the past, some unscrupulous tax avoidance schemes have advertised themselves as being “IR35 compliant” and “IR35 specialists”. These claims are almost undoubtedly unfounded.
Can you check if you have engaged with a tax avoidance scheme?
The government has recently introduced several pieces of guidance designed to help contractors understand how compliant umbrella companies work, and whether or not a payroll arrangement is a tax avoidance scheme. These guidance pieces are available below and are worth reading:
- Working through an umbrella company – an overview that explains how compliant umbrella companies should operate, to help you make a well-informed decision. The guidance is available here.
- Check how to reduce your risk of using an umbrella company that operates a tax avoidance scheme – despite being aimed at staffing agencies, this guidance explains how tax avoidance schemes pop up in the sector and what can be done to avoid them (as well as highlighting the risks of engaging with them). The guidance is available here.
- Check your payslip if you work through an umbrella company – a great tool for temporary workers using umbrella companies for their payroll. The guidance is available here.
To address the main question – can you check if you have engaged with a tax avoidance scheme – the answer is yes. A piece of guidance released by the government towards the end of 2021 was entitled ‘Check if you are at risk of tax avoidance’. It allows you to complete a short questionnaire that’ll help determine whether you’ve engaged with a tax avoidance scheme and what your next steps should be. If you are in any doubts you’ve used an unethical payroll establishment, please read the guidance at your earliest convenience.
What should you do if you have used a tax avoidance scheme?
If you believe you may have engaged with a tax avoidance scheme, whether intentionally or by accident, the government is urging you to get in contact with them.
If HMRC concludes that you have used a tax avoidance scheme, they will provide appropriate advice. If you have used a tax avoidance scheme, there will be an opportunity for you to settle your tax affairs.
If you fail to declare you have used a tax avoidance scheme in the past (even by mistake), you could face severe penalties, including fines and high interest payments. For more information, look up the 2019 Loan Charge.