Offshore Umbrellas use non-repayable loans => 20% tax?
Discussion
My accountant has just contacted me to advise of a new route to take as opposed to the Ltd status I currently operate. This is a slight twist to the usual umbrella schemes, which dont really offer me much worthwhile.
The route suggested was being an Employee of an offshore umbrella scheme, who remunerate partly by salary and partly by non-repayable loans. The overall tax equivalent was 20%pa (assuming £1k per day charge out rates).
Anyone (Eric) come across this before? I dont really understand how it works, i.e. whether there is still NI to be charged, or what the non-repayable loans are all about. But it stands to save me a good £40k+ per year.
The route suggested was being an Employee of an offshore umbrella scheme, who remunerate partly by salary and partly by non-repayable loans. The overall tax equivalent was 20%pa (assuming £1k per day charge out rates).
Anyone (Eric) come across this before? I dont really understand how it works, i.e. whether there is still NI to be charged, or what the non-repayable loans are all about. But it stands to save me a good £40k+ per year.
Several schemes in existance, 20% is very high (this is basically the fee you are paying the umbrella in most instances). Some as low as 10%
You can get pretty close to 80% return just running via a Ltd without the risk of a very large tax bill.
Head over to forums.contractoruk.com and do a search for offshore / IoM / EBT etc.
Current flavour of the month is to use IoM's double tax treaty to eliminate UK taxes, but the HMRC stance is not clear - i.e. they haven't taken anyone to court in a test case.
Certainly a high risk strategy.
You can get pretty close to 80% return just running via a Ltd without the risk of a very large tax bill.
Head over to forums.contractoruk.com and do a search for offshore / IoM / EBT etc.
Current flavour of the month is to use IoM's double tax treaty to eliminate UK taxes, but the HMRC stance is not clear - i.e. they haven't taken anyone to court in a test case.
Certainly a high risk strategy.
Which Offshore scheme by the way? Pretty sure the EBT / Loans route was killed off long ago. Not illegal as such, but not tax efficient either.
A few pertinent questions:
- Is it registered as a tax avoidance scheme with HMRC?
- Do you retain control of your fees earned at all times?
- What happens when the loan is called in? Just because a company says they won't call it in, an administrator might should the company get in trouble (large tax bill for example!)
- Does anyone underwrite/insure against HMRC investigation/fines/tax payable.
- Are you asked to sign an NDA (that prevents you obtaining independent tax counsel opinion)?
Also, many UK-based employment agencies will not deal with such offshore schemes for fear of being landed with a large Tax/NI bill by HMRC.
I know of several people who are nervously looking over their shoulders due to using schemes such as this. They may get away with it (some are under investigation, and have been for several years).
A few pertinent questions:
- Is it registered as a tax avoidance scheme with HMRC?
- Do you retain control of your fees earned at all times?
- What happens when the loan is called in? Just because a company says they won't call it in, an administrator might should the company get in trouble (large tax bill for example!)
- Does anyone underwrite/insure against HMRC investigation/fines/tax payable.
- Are you asked to sign an NDA (that prevents you obtaining independent tax counsel opinion)?
Also, many UK-based employment agencies will not deal with such offshore schemes for fear of being landed with a large Tax/NI bill by HMRC.
I know of several people who are nervously looking over their shoulders due to using schemes such as this. They may get away with it (some are under investigation, and have been for several years).
I dont have much of an idea, as I leave it all to my accountant. She is very good, and certainly not in the market of advising dodgy situations. (She's a family friend).
Apparantly the whole scheme is based from a company in Wales, but I dont know anything more.
I dont work with employment agencies, the majority of my contracts are direct with clients, and my field is exceptionally niche and so any agencies that do find contracts for me are usually just one-man band contractors of their own anyway.
I dont understand how you can get total tax liability down to 10%, that seems pretty low. I permanently reside in the UK and my Ltd firm is UK registered.
Apparantly the whole scheme is based from a company in Wales, but I dont know anything more.
I dont work with employment agencies, the majority of my contracts are direct with clients, and my field is exceptionally niche and so any agencies that do find contracts for me are usually just one-man band contractors of their own anyway.
I dont understand how you can get total tax liability down to 10%, that seems pretty low. I permanently reside in the UK and my Ltd firm is UK registered.
kryten22uk said:
I dont have much of an idea, as I leave it all to my accountant. She is very good, and certainly not in the market of advising dodgy situations. (She's a family friend).
Apparantly the whole scheme is based from a company in Wales, but I dont know anything more.
I dont work with employment agencies, the majority of my contracts are direct with clients, and my field is exceptionally niche and so any agencies that do find contracts for me are usually just one-man band contractors of their own anyway.
I dont understand how you can get total tax liability down to 10%, that seems pretty low. I permanently reside in the UK and my Ltd firm is UK registered.
From what I have seen is that for this to work you basically have to show that you are working for a company which is based offshore. Isle of Man, Gibraltar, wherever. Importantly, you will not be a company director or secretary. The company setting this up supply these and charge you fees for doing it. Apparantly the whole scheme is based from a company in Wales, but I dont know anything more.
I dont work with employment agencies, the majority of my contracts are direct with clients, and my field is exceptionally niche and so any agencies that do find contracts for me are usually just one-man band contractors of their own anyway.
I dont understand how you can get total tax liability down to 10%, that seems pretty low. I permanently reside in the UK and my Ltd firm is UK registered.
What you are basically saying is that the 'management structure' is offshore, and you are just a lowly employee working in the UK.
Of course, this is all nice until:
1) The rules chance again to outlaw the practice and you have just lost your set-up fees and you have a useless company. Or
2) You are a 'first strike' target for investigation each year, and if it looks like you are saving £40k a year you will be top of the hit list, and you may have a very sticky time proving you werent really managing the company from the UK.
A while back I investigated this and even went so far as to speaking with the company that sets it up in the Isle of Man, and even they told me that in my situation - similar to yours, it is not a great idea.
Edited by JustinP1 on Monday 21st January 16:07
UpTheIron said:
Several schemes in existance, 20% is very high (this is basically the fee you are paying the umbrella in most instances). Some as low as 10%
You can get pretty close to 80% return just running via a Ltd without the risk of a very large tax bill.
Head over to forums.contractoruk.com and do a search for offshore / IoM / EBT etc.
Current flavour of the month is to use IoM's double tax treaty to eliminate UK taxes, but the HMRC stance is not clear - i.e. they haven't taken anyone to court in a test case.
Certainly a high risk strategy.
Thanks UpTheIron, that contractor forum is doing my head in. They all brag about receiving >75% of gross income, but then every time someone asks about offshore umbrellas or the like, they get lambasted and told that the only way is Ltd or traditional Umbrella. I cant see any traditional UK way of getting a decent take-home percentage on a high wage. Are all offshore versions dodgy then? I dont like the sound of the EBT's.You can get pretty close to 80% return just running via a Ltd without the risk of a very large tax bill.
Head over to forums.contractoruk.com and do a search for offshore / IoM / EBT etc.
Current flavour of the month is to use IoM's double tax treaty to eliminate UK taxes, but the HMRC stance is not clear - i.e. they haven't taken anyone to court in a test case.
Certainly a high risk strategy.
kryten22uk said:
UpTheIron said:
Several schemes in existance, 20% is very high (this is basically the fee you are paying the umbrella in most instances). Some as low as 10%
You can get pretty close to 80% return just running via a Ltd without the risk of a very large tax bill.
Head over to forums.contractoruk.com and do a search for offshore / IoM / EBT etc.
Current flavour of the month is to use IoM's double tax treaty to eliminate UK taxes, but the HMRC stance is not clear - i.e. they haven't taken anyone to court in a test case.
Certainly a high risk strategy.
Thanks UpTheIron, that contractor forum is doing my head in. They all brag about receiving >75% of gross income, but then every time someone asks about offshore umbrellas or the like, they get lambasted and told that the only way is Ltd or traditional Umbrella. I cant see any traditional UK way of getting a decent take-home percentage on a high wage. Are all offshore versions dodgy then? I dont like the sound of the EBT's.You can get pretty close to 80% return just running via a Ltd without the risk of a very large tax bill.
Head over to forums.contractoruk.com and do a search for offshore / IoM / EBT etc.
Current flavour of the month is to use IoM's double tax treaty to eliminate UK taxes, but the HMRC stance is not clear - i.e. they haven't taken anyone to court in a test case.
Certainly a high risk strategy.
For example, if you were to live on the Isle of Man it is easy to start a Ltd company there, and IMHO (but of course I am not a solicitor...) if you were the sole director, even if you spent a lot of time working in the UK you would be taxed on the Isle of Man rate, which has more generous personal allowances and corporation tax.
There is a daily 'run' from Douglas airport to London city airport for people to commute each day, so I guess for them it must be worth it!
There may of course be some schemes I don't know about, and I was strung in to the 'ease' of the system, but the reality the ownership of your company needs to be abroad - and you need to trust someone to be your director and secretary and also really look to have your banking offshore. that brings problems into itself.
The way it has worked the best is for people who arnt already a Ltd company. For example, an IT consultant working by himself would be best under the 'umbrella' method, as the payments could easily go through the umbrella and it would seem that the management of the agency is abroad.
kryten22uk said:
I cant see any traditional UK way of getting a decent take-home percentage on a high wage. Are all offshore versions dodgy then? I dont like the sound of the EBT's.
Why do you require a high salary, it isn't tax (or rather NI) efficient. As for all offshore schemes being dodgy, if they weren't high risk, everyone would be doing it. Some I have looked into appear to be quite professionally set up and are most certainly "legal" - but that is in the eyes of one tax counsel, and no doubt HMRC could find a different viewpoint from another. The only "illegal" bit about it is if you don't pay any taxes due, and that is the area where the scheme administrators and HMRC will no doubt differ.
At circa 85% take home there isn't that much of an increase on the Ltd route. It's a case of whether the saving you may make is worth the risk of an HMRC investigation finding against the scheme or you as an individual.
For IR35-caught scenarios it might be more tempting, and the proposed CGT changes will make it slightly more advantageous.
Schemes I've looked at include www.taxdesign.co.uk and www.sanzar.co.im
Edited by UpTheIron on Monday 21st January 20:02
Edited by UpTheIron on Monday 21st January 20:08
UpTheIron said:
Why do you require a high salary, it isn't tax (or rather NI) efficient.
Whats the point of earning money if you dont have it to spend?! 
I take out everything I earn (save for corp tax and expenses). I dont know why people keep money in the companies, you still have to take out the money sometime and hence at which point you'll still pay dividend tax. UpTheIron said:
At circa 85% take home there isn't that much of an increase on the Ltd route.
Eh! I get charged 22% (eventually) corp tax and then a further 25% effective tax on divs. Hence overall 41.5% tax, and 58.5% take-home. So getting 85% is a massive difference. At £250k, thats a saving of £66k. Am i missing something? Were you quoting 85% of post-tax profits? UpTheIron said:
Schemes I've looked at include www.taxdesign.co.uk and www.sanzar.co.im
Cool, cheers I'll look into them.UpTheIron said:
Schemes I've looked at include www.taxdesign.co.uk and www.sanzar.co.im
Crikey, that Tax Design gives 90%! Sooo tempting, but cant get the "if it sounds too good to be true..." out of my head.Very rough examples, not including any significant costs / expenses...
250k Income, 19% CT, 10% CGT - circa 75% net
250k Income, 22% CT, 18% CGT - circa 67% net
100k Income, 19% CT, 10% CGT - circa 79% net
100k Income, 22% CT, 18% CGT - circa 73% net
Based on small salary, large dividend to higher rate limit and rest taken as a capital distribution.
Obviously lots of factors not included.
With the new CGT rates, another calculation:
250k income, 22% CT, take the rest as dividends - circa 63% net.
Basically the abolishion of taper relief and the increase in CT makes the tax saving small, income shifting legislation will close that avenue as well.
Bend over and take it, at least we still avoid the NI!
And yes, the 90% one does look tempting, even if just for a few months.
250k Income, 19% CT, 10% CGT - circa 75% net
250k Income, 22% CT, 18% CGT - circa 67% net
100k Income, 19% CT, 10% CGT - circa 79% net
100k Income, 22% CT, 18% CGT - circa 73% net
Based on small salary, large dividend to higher rate limit and rest taken as a capital distribution.
Obviously lots of factors not included.
With the new CGT rates, another calculation:
250k income, 22% CT, take the rest as dividends - circa 63% net.
Basically the abolishion of taper relief and the increase in CT makes the tax saving small, income shifting legislation will close that avenue as well.
Bend over and take it, at least we still avoid the NI!
And yes, the 90% one does look tempting, even if just for a few months.
I live on the Isle of Man but am not a financial type.. As already stated the umbrella company is based in the Isle of Man and thus pays little or no corporation tax. Income tax in the IOM is about half the UK - visit this site to work out the difference being employed in the Isle of Man versus the UK http://www.taxometer.net/default.asp?docId=12496# or just search for iom taxometer in Google. An example £40k is as follows:
Your salary/joint salary (gross income):£40000
Income Tax payable (Isle of Man):£4767
Income Tax payable (United Kingdom):£7414.4
As your umbrealla company employs you it pays you from the Isle of Man. You send them timesheets and expense forms and they do the comapany filings and tax and pay you a wage plus expenses. Because of the tax saving shown above, they can take half that tax per annum as their profit from you, and you still get the benefit of the remaining tax saving.
The umbrella comapanies have been running with no big shakes from UK legislation changes since I came to the Island around 7 years ago. They service contractors all over the world.
I am not sure if this means you pay NI in the Isle of Man too though.. I can't see that being the case.. That would mean a hole in your NI contributions, which in turn might mean you have to pay full whack for prescriptions in the UK like I did when I visited once, amoungst other potential problems.
Hope that helps!
Your salary/joint salary (gross income):£40000
Income Tax payable (Isle of Man):£4767
Income Tax payable (United Kingdom):£7414.4
As your umbrealla company employs you it pays you from the Isle of Man. You send them timesheets and expense forms and they do the comapany filings and tax and pay you a wage plus expenses. Because of the tax saving shown above, they can take half that tax per annum as their profit from you, and you still get the benefit of the remaining tax saving.
The umbrella comapanies have been running with no big shakes from UK legislation changes since I came to the Island around 7 years ago. They service contractors all over the world.
I am not sure if this means you pay NI in the Isle of Man too though.. I can't see that being the case.. That would mean a hole in your NI contributions, which in turn might mean you have to pay full whack for prescriptions in the UK like I did when I visited once, amoungst other potential problems.
Hope that helps!
Edited by TurricanII on Wednesday 23 January 00:22
TurricanII said:
I...and pay you a wage plus expenses. Because of the tax saving shown above, they can take half that tax per annum as their profit from you, and you still get the benefit of the remaining tax saving.
Many of the schemes use different methods than "wage plus expenses", such as Offshore Trusts and use of the UK-IoM double tax treaty.As I mentioned before though, although I know this works, I am not sure it is applicable to the OP's exact situation.
If you are just a 'sole trader' at the moment such as a consultant you can 'work' for an already set up IOM company and they can direct your money through there.
The other more complex way would be if you wanted to keep the Ltd company structure for yourself. You would then have to pay the agency to have a registered office, director and secretary in the IOM. I am not sure of the potential pitfalls due to 'trust' about this, however, if you were investigated it might be pretty obvious if you were the UK 'boss' and you had 3 employees in the UK that the management structure was indeed in the UK and therefore subject to UK taxes.
If you were investigated I think you would have to be cast iron, that is show that the IOM directors and secretaries actually do something and all the company resolutions were actually over there, and you might need the plane tickets to prove it!
You could get clever and somehow say it was all done by telephone/weblink, but as far as I am aware there is no case law for this which you can bet your bottom dollar will be a prime target for the revenue...
As for an existing UK Ltd company, I dont think there are any viable options. I dont think just writing out an invoice from the IOM or even having a bank based there fulfils anywhere near the rules.
If you are just a 'sole trader' at the moment such as a consultant you can 'work' for an already set up IOM company and they can direct your money through there.
The other more complex way would be if you wanted to keep the Ltd company structure for yourself. You would then have to pay the agency to have a registered office, director and secretary in the IOM. I am not sure of the potential pitfalls due to 'trust' about this, however, if you were investigated it might be pretty obvious if you were the UK 'boss' and you had 3 employees in the UK that the management structure was indeed in the UK and therefore subject to UK taxes.
If you were investigated I think you would have to be cast iron, that is show that the IOM directors and secretaries actually do something and all the company resolutions were actually over there, and you might need the plane tickets to prove it!
You could get clever and somehow say it was all done by telephone/weblink, but as far as I am aware there is no case law for this which you can bet your bottom dollar will be a prime target for the revenue...
As for an existing UK Ltd company, I dont think there are any viable options. I dont think just writing out an invoice from the IOM or even having a bank based there fulfils anywhere near the rules.
UpTheIron said:
Many of the schemes use different methods than "wage plus expenses", such as Offshore Trusts and use of the UK-IoM double tax treaty.
The Tax Design scheme, isnt an IoM umbrella. Its a UK umbrella, but you arent "employed". You have a contract of services with the UK firm and hence are "self-employed". They pay you £10k pa and the remaining contract rate goes to an IoM trust, who benefit from the DTA. The IoM give you 90% of your gross earnings (less the £10k) and hence you have a fully compliant PAYE+NI status just with very little Tax+NI to pay. The scheme is fully registered with HMRC and the only way that they can come at you for more tax is if they scrap the DTA with IoM (which wont happen in a hurry). Eventually, they may close the DTA/Trust loophole, but may as well benefit in the mean time.This method would involve leaving my Ltd dormant (or winding it up).
Anyone have any experience of the exact workings of the Trust payments (this is NOT an EBT) and the DTA?
Edited by kryten22uk on Wednesday 23 January 12:10
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