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.
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.
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