HMRC has warned taxpayers about new tax avoidance schemes, all of which involve paying remuneration in a form that doesn’t incur income tax or NIC.
The HMRC spotlights area of gov.uk is used to highlight tax avoidance schemes which they believe don’t work. The most recent schemes listed on this page all relate to disguised remuneration; i.e. paying someone in a form which attracts little or no tax or national insurance.
These schemes have not been tested at a tax tribunal or higher court; it is only HMRC’s opinion that they don’t work. However, the listing on the spotlights page is fair warning that HMRC will pursue taxpayers who are using such schemes by enquiring into their tax affairs, and charging interest and penalties on late paid tax. When a tax assessment is issued, it can be appealed, and only at that stage will the details of the scheme be examined by an independent court.
Spotlights numbered 35, 36 and 37 are described below.
Spotlight scheme number 37 plays upon the contractor’s fear of running out of work by requiring him to advertise his services on a connected jobs board.
The individual is employed by an umbrella company, who hires out his services to third parties. The umbrella company pays him a small wage with little or no tax deducted, and pays the majority of the fee earned to the owner of the jobs board. The individual is awarded loyalty points for the time his job advert remains on the board. He can then exchange those loyalty points for cash which is paid without tax or NIC deducted.
HMRC believe the exchange of loyalty points for cash is taxable income. What’s more, the individual should be taxed on the full amount due to him from the umbrella company, including the fee diverted to the promotor of the jobs board. Any employment agency using such a scheme may be liable for penalties for failing to deduct the correct amount of tax and NIC.
Spotlight scheme number 35 uses the vehicle of an annuity to turn a salary into an investment made for a guaranteed income, but not the way you may imagine.
The contractor is paid a small wage with little or no tax deducted. The majority of the fee he receives is categorised as a capital payment to acquire a deferred annuity, which will then be payable to the promoter of the scheme. The individual has received a non-taxable capital payment in return for promising to pay an annuity at some date at the promotor’s choosing.
This is in effect another version of the contractor’s loan scheme, as the annuity is never actually paid. HMRC’s view is that schemes using annuities as a form of investment, where a person pays a lump sum in return for a guaranteed income, do not work.
In March 2016 I described how a retrospective tax was to be imposed on contractor loans from 6 April 2019. Spotlight number 36 explains that HMRC are aware of attempts to side-step that charge.
Although HMRC’s note confirms that repayment of the loan balance can avoid the new loan charge, there is no detail on the format or construction of the schemes supposedly highlighted by the spotlight. HMRC simply assert, without any explanation, their view that schemes to avoid the loan charge will not work.