Paying the right amount of tax is a hot political topic right now and it is clear that HMRC have increased their efforts to put an end to various 'tax saving schemes'. Recently one of our clients was contacted by a company proffering an apparent great tax saving method that was 'compliant with HMRC legislation'.
Here is what the company stated in their email communication:
You will receive between 82%-89% of your income back with this planning solution. Effectively, you will pay 11%-18%
All accounting and tax returns are completed for you.
You will have no charge for our administration service which will be more competitive than an accountant as all accountancy is done on your behalf as a valued customer.
As soon as your client payment has cleared. You will be paid your 82% -89% if on the IQ Product
It is our experience that the majority of contractors, claiming large expenses, will still have an income tax liability of 22% -30%. Our solution will ensure that you only pay 11%-18%.
If you are a high earner, over £180 per day, your marginal rate of income tax could be 40%, potentially even 50%. It is likely that you will have fully utilised your ability to claim expenses and that you will have a tax liability. Our solution will ensure that you only pay 11%-18%.
They quote an illustration as follows:
Fee Income £115,000
PAYE deducted £2,008 (1.75%
Available drawings £99,475 (86.5%)
Sounds great doesn't it (although if its that great why are we not all doing this?) but what is the reality behind the hype?
The scheme is based in the Isle of Man and is basically a loan scheme. You get a £12k salary, pay tax of £2k and borrow the rest. What the company have conveniently omitted to say is that in their example above the balance of £13,517 (11.75%) is kept by them as their fees.
Other very important points to note are:
Claims that it is HMRC compliant are highly dubious
Marketing material states 'HMRC and successive governments do not approve of such schemes as they are losing vital tax revenue, their only power to stop them is to change legislation'. HMRC can and do challenge such schemes and every participant will be personally investigated.
If the courts find in HMRC favour, you would be hit by high levels of penalties (maximum 200% of the tax due) and interest.
This is just the kind of scheme that HMRC have stated in the last Budget that they are looking to investigate.
If you are looking for mortgage finance, they would be very unlikely to lend to someone who shows such little income and can only show very high levels of loans taken.
This is one to steer well clear of.