I work as a contractor & last year a friend introduced me to one of these schemes (he was after the sign up a mate bonus!) I didn't join as it looked a bit dodgy to me but here are the key details (couldn't copy in the diagrams) from the presentation. I've removed the company name.
Two recent surveys make sober reading:
Freelance World found majority of accountants do not understand IR35
Accountancy survey found 4 in 5 contractors are caught by IR35
Recent HMRC attack on construction industry is typical of the new attempt to get more tax from contractors
New tax rates in 2010 will increase tax costs
The risk profile of one man band limited companies has risen dramatically
Jon Bessell, owner/MD of Dragonfly and a member of PCG, said he was devastated by the £99k IR35 High Court judgement
John Brazier, managing director of PCG, said „This case threatens the long-established defences against IR35&;
61656;The KEY points are:
–the contractor can no longer ensure he is in control of his IR35 Status
–The contractor faces prolonged uncertainty
–Even those comfortable with their status face a difficult economic decision about the cost of defending it –the marketing of fear
–The tax being demanded has already been spent over a number of years
–IR35 assessments can be collected from the directors personally
Structure choices
Risk
Reward
Comments
Employment
None
Very low
52 –65%
Employer suffers NIC and employment costs
Self employment
High
Low
55 –65%
Status risk
No shelter from highest rate of tax
Limited company
High
Medium
55 –70%
Company admin
IR35 and income shifting concerns
Umbrella
Low
Medium
65-68%
Expenses targeted by HMRC
Very low
High
79 –82%
Best balance of risk and reward
Who Is It For?
Contractors who:
Are either self employed, work through their own company, or are in an agency or umbrella company
Earn more than £50k per annum gross
Have a small number of recurring contracts
are liable to UK income tax
Contact us if you work overseas, or in an unusual or dangerous occupation
Key Benefits
81% return on contract value after ALL costs
Eliminates IR35 and MSC risk
Provides 27% saving on inheritance tax
No costs of entry or exit
No minimum contract period –leave at any time
No admin apart from a timesheet
High class service standards
Bad debt cover
10How It Works
Contractor becomes employee of ***** Trust
He is hired out to customers and ****** Contracts does the administration of the contract
Part of contract paid as minimum wage salary
Balance is paid as a discretionary bonus into a trust for the contractor every 4 to 6 weeks
Contractor takes an interest-free loan from the trust
Loan is never written off
FAQ -Are there any delays in getting my money?
You will get your money in two ways:a) Monthly salary on the 10thof each monthb) Bonuses paid into the trust to be taken as loans
Bonuses are paid 10 times per year, at four to six week intervals
This means 2 months when no bonus is paid –double bonus next month
Bonus dates available in advance to ensure cashflow is planned for
This is most acute when you join the scheme
Three ways to deal with this:
–Emergency loans up to £5k from *****
–Emergency bonuses from ***** Trust
–Contractor has overdraft facility of at least £5k
Where does the 20% go?
All tax and NI on your income
Payroll Processing
All meetings/Correspondence
Dealing with Tax/HMRC queries in relation to IOM employment
Invoicing/Debtor collection
Professional Indemnity Insurance up to £1million
Employer‟s Liability/Public Liability Insurance
Discretionary bad debt cover
Trustee Costs
Q.C. and Legal/Tax opinions
15FAQ -Do I have to repay the loan?
In practice, extremely unlikely
Nearly 10,000 businesses and contractors have used this mechanism and no-one has yet had to repay it.
However, there needs to be the POSSIBILITY of repayment, otherwise it would not be a loan –Dextra ruling
IMPORTANT: the trustees administering the trust are obliged by both LAW and the terms of the trust deed to act in the interests of the beneficiary
When will a request to repay the loan ever be in the interest of the contractor?
The trustees themselves cannot, under any circumstances, derive any benefit from the money held in the trust –just like pension funds.
Even if the loan were repaid, the trust would then hold an equivalent amount for the benefit of the contractor, so unlike repaying a third party, you would in effect be repaying yourself.
What happens when I die?
Deduct loan from value of estate for probate
Income tax implications of write off disappear
Beneficiaries step into shoes of contractor
They may request write off of loans on the basis the person who took them out has passed away
Trustees must act SOLELY in the interests of the new beneficiary when assessing the request
FAQ -Will the loan affect my credit status?
No. The loan is a private arrangement, and not disclosed publicly via credit rating agencies.
Your salary is low compared to the gross contract value, but we can arrange a letter in support of your gross earnings which is normally sufficient for any mortgage lenders.
FAQ -Are there any tax effects of the loan?
One –an annual tax charge, equivalent to 0.3% of the loan in first year for the majority of contractors (ie those earning less than £250k pa).
Cost is far less than mortgage interest
Costs exceeded by interest earned on extra return
This charge only lasts as long as you are on the scheme
Other ways to look at this tax charge:
-As a cost of inheritance tax reductions -0.3% to get 27% saving
–As a cost of outsourcing all administration
–As a cost of transferring business and tax risk to *** and ****
–As a cost of insurance lower than annual PII cover
21Why It Works
Both IR35 and the Managed Service Company legislation attack payments to employees that are not employment income
All the payments we make are classified as employment income under ITEPA 2003
Loans to employees from EBTs are not taxable
MSC Regulations don‟t attack trusts
This position has been endorsed by four tax barristers
Why is **** Trust in Guernsey?
Nothing to do with secrecy!
Firstly, HMRC attacks on EBT planning in UK concentrate on CT deduction, BUT trusts are not taxed in Guernsey, so this attack doesn‟t work.
Secondly, the financial regulatory regime is much stricter in Guernsey than mainland UK, which provides reassurance that your affairs will be run properly
It is worth noting that while **** is in Guernsey, it still operates UK PAYE.
23What are my tax risks?
Basically, minimal.
Tax scheme used by the company, not the contractor
NIL assessment under IR35 and MSC
Since contractors become employees, they cannot be liable for any tax levied on their employer under PAYE, IR35 or MSC
MSC regulations don‟t apply to trusts, so debt cannot be transferred
Scheme structure established by DEXTRA case 2002 –employee loans not challenged until 2009 when HMRC lost again (Sempra Metals)
Retrospective legislation is extremely unlikely:
–Breaches human rights legislation
–Not been done for 50 years
–All legislation against EBTs applies from that date on
–Taxpayer entitled to certainty of the law in decision-making
No tax hangover if scheme is closed
24What are the scheme risks?
IMPORTANT -not all EBT / loan schemes are the same
Forums are well-meaning, but often populated by the noisy and ignorant, and even HMRC!
You cannot go to prison, get fined, get investigated just for becoming an employee of ours
The marketing of fear, based on partial truths from bad schemes
Look at the integrity and professionalism of those behind the scheme to understand whether it works
