Contractor use of service companies – how viewed by HMRC?
Discussion
I’m looking at doing some contract/interim work right now and I stumbled across a number of schemes which claim to allow contractors to retain substantial % of their front-end contract value.
One in particular was offering 86% retention via your Ltd Co.
Scheme was roughly one of your Ltd Co takes on contract for services with client (could be contracting not just genuine consulting work) and you then effectively sub-con all your service requirements including manpower via a service provider (covers invoicing, accounting etc.) which you then route some or all of your contract value to.
Service provider then uses you to provide the manpower to your client.
You pay a minimal level of salary to yourself via your Ltd Co with appropriate NI and tax levels paid. Service provider provides you with a loan at the lowest possible commercial rate which can be paid off after a few months or longer if you wish. However there is no commitment on you to pay off the loan, this is paid for from an investment pool backed up by guarantees in the event the (low risk) investment doesn’t have sufficient return to pay off the loan.
I’m told this particular scheme has been operating for around 20 years and has been investigated by HMRC who can find nothing of concern with it and who do not classify it as a tax avoidance scheme as the appropriate tax and NI are paid at all stages.
I’m not looking for comments on the moral aspects of this scheme and I doubt I will use it, but I did wonder if anyone on here has any knowledge of these schemes and how they are viewed by HMRC?
Over to you.
One in particular was offering 86% retention via your Ltd Co.
Scheme was roughly one of your Ltd Co takes on contract for services with client (could be contracting not just genuine consulting work) and you then effectively sub-con all your service requirements including manpower via a service provider (covers invoicing, accounting etc.) which you then route some or all of your contract value to.
Service provider then uses you to provide the manpower to your client.
You pay a minimal level of salary to yourself via your Ltd Co with appropriate NI and tax levels paid. Service provider provides you with a loan at the lowest possible commercial rate which can be paid off after a few months or longer if you wish. However there is no commitment on you to pay off the loan, this is paid for from an investment pool backed up by guarantees in the event the (low risk) investment doesn’t have sufficient return to pay off the loan.
I’m told this particular scheme has been operating for around 20 years and has been investigated by HMRC who can find nothing of concern with it and who do not classify it as a tax avoidance scheme as the appropriate tax and NI are paid at all stages.
I’m not looking for comments on the moral aspects of this scheme and I doubt I will use it, but I did wonder if anyone on here has any knowledge of these schemes and how they are viewed by HMRC?
Over to you.
Why not just set up your own company and cut out the middle man completely?
Schemes such as the one you describe are no more or less vulnerable to an HMRC enquiry than if you operate through your own company. And, if you go through your own company, you can sort out terms and conditions of the contracts that reduce vulnerability to IR35.
Schemes such as the one you describe are no more or less vulnerable to an HMRC enquiry than if you operate through your own company. And, if you go through your own company, you can sort out terms and conditions of the contracts that reduce vulnerability to IR35.
Eric
Thanks and I am looking at the Ltd Co option in any case - I have no choice as it's usually a requirement of getting the work.
You are right that one concern I have is that IR35 might trump such arrangements should you get declared as a disguised employee - I don't know if this is or isn't the case of course and I'm told HMRC looked at this scheme on and off for some 6 years and hasn't so far found a way to stop it.
However, even in a genuine consultancy based Ltd Co scenario I don't see how to achieve better than 75% earnings retention (before any pension or other tax reducing investments). As said this scheme looks to achieve 86% which is a substantial difference.
Hence my question of what experience is out there of the operation of such schemes.
Thanks and I am looking at the Ltd Co option in any case - I have no choice as it's usually a requirement of getting the work.
You are right that one concern I have is that IR35 might trump such arrangements should you get declared as a disguised employee - I don't know if this is or isn't the case of course and I'm told HMRC looked at this scheme on and off for some 6 years and hasn't so far found a way to stop it.
However, even in a genuine consultancy based Ltd Co scenario I don't see how to achieve better than 75% earnings retention (before any pension or other tax reducing investments). As said this scheme looks to achieve 86% which is a substantial difference.
Hence my question of what experience is out there of the operation of such schemes.
Any scheme avoid with a very large barge poll, you might get a 10% increase now but it could take HMRC upto 6-10 years if not longer to catch up with you and then you will regret it. Things have changed now HMRC dont have to take you to court first to get the £ they believe you owe, they can now take the £ via an APN and then you have to go to court to claim it back ! Scheme providers in most cases will dispear and as always with tax its you who are responsible.
If you want a bit of sobering reading on the matter check out this forum dedicated to it http://forums.contractoruk.com/hmrc-scheme-enquiri...
Just do a ltd company simples 10% extra is not worth the hassle, if you worried about IR35 though and you off an age were you ok pumping into a pension do that takes away a bit of the pain. Schemes are not worth it I have friends who used schemes who are now looking at tax bills / fines of hundreds of thousands.
If you want a bit of sobering reading on the matter check out this forum dedicated to it http://forums.contractoruk.com/hmrc-scheme-enquiri...
Just do a ltd company simples 10% extra is not worth the hassle, if you worried about IR35 though and you off an age were you ok pumping into a pension do that takes away a bit of the pain. Schemes are not worth it I have friends who used schemes who are now looking at tax bills / fines of hundreds of thousands.
Edited by BumFLuff on Friday 15th May 18:49
smckeown said:
My advice is to use your own Ltd and steer clear of those firms. There isn't a Hugh difference in net earnings,and you have no risk of hmrc chasing you for large tax payments years down the line.
I certainly would not say "no risk". However, if you are operating through your own company, with the right advice and the right practices and the right frame of mind, you can lessen the likelihood of HMRC becoming interested in what you are doing.I would strongly advise that people who do operate through their own company read up on the "Dragonfly Ltd" case. You will see where HMRC line up their attacks and you will also learn where Dragonfly went wrong and hopefully not make the same mistakes.
http://www.contractoruk.com/ir35/why_dragonfly_got...
There are plenty of good companies out there that operate completely above board and compliantly and do not go down the disguised remuneration route. Stay well away from any companies that offer payment in the forms of loans, pensions or anything that doesn't sound standard.
The benefits for using an accountancy company (which is how these companies market themselves) is that they will be able to provide the required insurances including PI much cheaper than you could procure directly and they may do your end of year tax return as part of the overall package.
Have a look at www.ipse.co.uk for a decent place to do your research. The best way of reducing tax is to offset your expenses against it, so depending on how far you have to commute and other costs you incur in your role will depend on the % take home, but in reality you are looking between 70 to 80%, which of course is much better than PAYE.
The benefits for using an accountancy company (which is how these companies market themselves) is that they will be able to provide the required insurances including PI much cheaper than you could procure directly and they may do your end of year tax return as part of the overall package.
Have a look at www.ipse.co.uk for a decent place to do your research. The best way of reducing tax is to offset your expenses against it, so depending on how far you have to commute and other costs you incur in your role will depend on the % take home, but in reality you are looking between 70 to 80%, which of course is much better than PAYE.
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