Umbrellas and tax avoidance.

[Big Rod]

For a number of reasons, I'm trying to get back into contracting after a number of years as a permy.

I've been looking at the options open to me regards accountancy and the like and was looking for a bit of advice.

Even though the idea of having my own PLC is appealing, I really can't be harrised witht he administrative overhead that would incur, so it's an umbrella company by the looks of it.

When I was contracting before, I was seeing about an 80-82% return of my gross and was somewhat dismayed to find that's not the case any more and company's like Parasol can only 'offer' about 65%. I did however find a company based in IoM who appear to offer a service more like I was accustomed to in my previous contracting experience whereby I'd be paid in dividends.

Can anyone keep me straight and point out in an unbiased manner what the pros,cons and risks are in this method these days?

TIA!

[Eric Mc]

You definitely don't want a PLC.

However, don't be so quick to write off a normal limited company (Ltd).

I would bet that the admin costs of running your own limited company would be substantially less than being handled by an "umbrella". The dowwnside is the fact that you need to be on the ball as to what your statutory and tax obligations are.

[Big Rod]

Sorry, yeah I meant Ltd, not PLC. Don't know what I was thinking.

I reckon I'd struggle to keep abreast of the admin and ins and outs of taxes etc, which is why I'm going for a 'brolly corp.

[Eric Mc]

Big Rod said:

Sorry, yeah I meant Ltd, not PLC. Don't know what I was thinking.

I reckon I'd struggle to keep abreast of the admin and ins and outs of taxes etc, which is why I'm going for a 'brolly corp.

But that is where your accountant comes in. Still cheaper than an umbrella.

[T89 Callan]

I suppose it depends on how much you are earning?

While at JLR I was with an Umbrella company taking home around 84% of my pay, although I was comuting 1000 miles a week.

I was getting charged around £25 per week by the Umbrella company but in reality (after some tax cancelling stuff) it only cost me £13 per week.

To be honest to some it seemed like a lot to pay but they did everything promptly and efficiently and I could always ring straight through to one of the lovely sounding girls who worked there and get an imediate answer if I needed anything or they would ring me straight away and get stuff sorted if there was any problem with my pay/expenses.

And to be honest £13 a week was 1/2 hours pay, setting up a limited company would have probably taken me (who knows nothing at all about accounts) hours and hours and hours.

ETA: the question is do you want to pay a few quid for a stress free situation were somebody does everything for you or bugger about setting up a company for a few extra quid. And is the extra money you save worth the extra effort?

Edited by T89 Callan on Wednesday 16th December 15:59

[L1OFF]

I have my own Ltd company with the day to day admin carried out by my accountants, I'm charged £20 pw for invoicing, vat etc and £600 for end of year accounts. I don't see any of the vat, ni or tax deductions as they transfer my salary from the business account(they have control of that)and expenses into my personal account. I usually see 85% of my gross. Been with them for 2 years or so and am very happy.

Alan

[Eric Mc]

T89 Callan said:

I suppose it depends on how much you are earning?

While at JLR I was with an Umbrella company taking home around 84% of my pay, although I was comuting 1000 miles a week.

I was getting charged around £25 per week by the Umbrella company but in reality (after some tax cancelling stuff) it only cost me £13 per week.

To be honest to some it seemed like a lot to pay but they did everything promptly and efficiently and I could always ring straight through to one of the lovely sounding girls who worked there and get an imediate answer if I needed anything or they would ring me straight away and get stuff sorted if there was any problem with my pay/expenses.

And to be honest £13 a week was 1/2 hours pay, setting up a limited company would have probably taken me (who knows nothing at all about accounts) hours and hours and hours.

ETA: the question is do you want to pay a few quid for a stress free situation were somebody does everything for you or bugger about setting up a company for a few extra quid. And is the extra money you save worth the extra effort?

Edited by T89 Callan on Wednesday 16th December 15:59

If the accountnat is looking after it correctly for you - and you liaise together frequently, it should be even more hassle free than an umbrella.

[FNG]

Looking over my gross / net income when running ltd co, I reckon an umbrella company would cost me about £320 a month more, when bringing in £200 a day.

The biggest aspect about whether it's effective enough to go with an umbrella company is, I think, how much in expenses you can offset. Seems that travel is the big allowable expense (or accommodation & overnight subsistence) but that's not necessarily a lot relative to a decent contracting gross income.

I found it dead easy for most of the year then a lot of hassle in January, although that could have been mitigated if I'd bothered to develop a system / routine of keeping on top of the receipts and expenses on a monthly basis.

[Big Rod]

Well, the decision's been made to go down the umbrella company route already, I was just wondering which one.

I get the feelong there may be more risk involved using the IoM based company rather than a UK one like Parasol, so I was just wanting someone to put it all into plain English what the riskd and potential gotchyas were of using such an outfit.

[Eric Mc]

Is this an Offshore Umbrella then?

That is BIG risk if it is.

[Big Rod]

Eric Mc said:

Is this an Offshore Umbrella then?

That is BIG risk if it is.

Thanks Eric.

I'd consider Isle of Man to be off shore yes, although they work with an on shore umbrella company too for whatever reason, and the girl on the phone reckons they 'work' closely with HMRC. She says I'd be paid minimum wage and the balance after deductions would be paid to me from a trust fund.

What I need to kmow is, what's the risk and why is it so big?

[deckster]

Big Rod said:

Eric Mc said:

Is this an Offshore Umbrella then?

That is BIG risk if it is.

Thanks Eric.

I'd consider Isle of Man to be off shore yes, although they work with an on shore umbrella company too for whatever reason, and the girl on the phone reckons they 'work' closely with HMRC. She says I'd be paid minimum wage and the balance after deductions would be paid to me from a trust fund.

What I need to kmow is, what's the risk and why is it so big?

Do. Your. Research. Find out *exactly* how this scheme works. Look at the company running it. Are they an established tax planning provider or have they just taken somebody elses ideas? What will happen when (not if) you are investigated by the Revenue?

Find out exactly what your liabilities will be with this scheme. Look at running a Ltd company inside and outside IR35. Look at umbrellas. Work out your expected income in each case. Decide what your attitude to risk is.

Once you've done that, look up what powers the Revenue have. Look up BN66 and section 58 of the Finance Act. Realise that you will not be able to spend any of the tax you save for at least six years, likely longer. Know that the Revenue will take a very close interest in you.

I used an offshore scheme for six years. I did very nicely and paid very little tax, in much the same way that you are proposing. In 2008, HMRC introduced a retrospective change to the tax laws ('BN66', as referred to above) that made the entirety of the income taxable. This is a scheme that was promoted by a prominent tax planning consultancy, backed by QCs opinion, and was largely unchallenged by the Revenue until they introduced this retrospective change. I am now staring at a £300,000 tax bill and, if we lose the various legal challenges that are currently in motion, will lose my house and will most likely be bankrupted.

Does the offshore route still sound like a good idea?

[Eric Mc]

Sounds serious.

I was at a tax lecture on Saturday and the lecturer ( a respected tax adviser and Chartered Accountant who advises other accountants and the professional institutes) said that he would avoid off-shore trusts for contractors "like the plague".

There is also the massive risk in the fact that you are effectively "waiving" your right to a salary for the work you are doing and accepting what is actually a loan - fully repayable on demand by the lender. You have to accept their word for it that they will never attempt to recover the loan.

The whole construct of these operations is a sham and I am amazed it took HMRC so long to get to grips with them.

[Big Rod]

Hmm! It's not seeming to be such a great idea now. I guess it might be a case of 'too good to be true' huh?

Thanks for the heads up guys, I'll definitely be looking into this in more detail.

Hope it all works out for you Deckster!!

[shirt]

Eric Mc said:

T89 Callan said:

I suppose it depends on how much you are earning?

While at JLR I was with an Umbrella company taking home around 84% of my pay, although I was comuting 1000 miles a week.

I was getting charged around £25 per week by the Umbrella company but in reality (after some tax cancelling stuff) it only cost me £13 per week.

To be honest to some it seemed like a lot to pay but they did everything promptly and efficiently and I could always ring straight through to one of the lovely sounding girls who worked there and get an imediate answer if I needed anything or they would ring me straight away and get stuff sorted if there was any problem with my pay/expenses.

And to be honest £13 a week was 1/2 hours pay, setting up a limited company would have probably taken me (who knows nothing at all about accounts) hours and hours and hours.

ETA: the question is do you want to pay a few quid for a stress free situation were somebody does everything for you or bugger about setting up a company for a few extra quid. And is the extra money you save worth the extra effort?

Edited by T89 Callan on Wednesday 16th December 15:59

If the accountnat is looking after it correctly for you - and you liaise together frequently, it should be even more hassle free than an umbrella.

how does this work eric, do you simply register the company and set up the bank account, walk into the accountant and have them do the rest?

can you recommend a nice plain english website to explain it for those of us who no nothing about tax please?

[Big Rod]

shirt said:

how does this work eric, do you simply register the company and set up the bank account, walk into the accountant and have them do the rest?

can you recommend a nice plain english website to explain it for those of us who no nothing about tax please?

I could use a bit of that as well actually if you could point me/us in the right direction.

Anyway, since the seed of doubt was placed in my head regarding this 'offshore' shenanigans, I called the company today to get a bit more info'. Not surprisingly, they were quite convincing. See what you think..........

1) The offshore thing being spoken about mainly on this thread 'I think' was based upon the 'double taxation' clause whereby UK based contractors were registering themselves as corporations to take advantage of the IoM's 0% corp tax rate. This scheme doesn't work in the same way 'in so much as' under this it I'd be an employee of the umbrella company and so falls outwith the BN66 legislation.

2) The scheme I'm looking into has been approved, (for want of a better word), as a legitemate tax avoidance scheme by HMRC. Granted it utilises loopholes in the rules and reg's, but it's all legal and above board and is backed by Baker/Tilly trust managers, (apparently a big name!!).

Any opinions on this?

[Eric Mc]

What are you being paid - salary or a loan or a dividend?

If a loan - what are the terms and conditions?

Where do YOU live - the UK or the Isle of Man?

Edited by Eric Mc on Thursday 17th December 11:33

[ChrisMCoupe]

With these off-shore loans schemes, am I right in thinking that the 'loop-hole' they use is that the trust fund HAVE to act in the best interests for the client. i.e It will never be in the clients best interest to repay the loan, therefore they will never be able to ask you to do so?

I was with a Isle of Man based company for almost 2 years, using a trust fund scheme I don't think I will return to them once I work back in the UK again.

[Eric Mc]

ChrisMCoupe said:

With these off-shore loans schemes, am I right in thinking that the 'loop-hole' they use is that the trust fund HAVE to act in the best interests for the client. i.e It will never be in the clients best interest to repay the loan, therefore they will never be able to ask you to do so?

I was with a Isle of Man based company for almost 2 years, using a trust fund scheme I don't think I will return to them once I work back in the UK again.

If they never have to repay it - how can it be defined as a "loan"?

[ewenm]

Lots of useful stuff on the Professional Contractors Group website.