HMRC puts 'Spotlight' on contractor scheme

HM Revenue and Customs has turned its tax avoidance 'Spotlight' on a new scheme being advertised to contractors and those using recruitment agencies.

HMRC produces occasional reports, known as 'Spotlights', which it describes as part of its consumer protection role to help tax payers 'avoid unwittingly entering into arrangements that HMRC are likely to see as tax avoidance. It does this by identifying the types of arrangements or scheme which HMRC are likely to challenge'.

In the past these reports have covered Stamp Duty, Gift Aid, pension schemes and VAT artificial leasing. The latest, Spotlight 12, (Taxing the rewards for work carried out for a UK based employer) has been published on HMRC's website. It says:

"HMRC are aware that new tax avoidance schemes that seek to avoid Income Tax and National Insurance contributions (NICs) are being advertised to contractors, highly paid employees and those using recruitment agencies. It is claimed that these schemes get around new disguised remuneration rules.

"Arrangements may involve payments passing through a series of companies, loans from a third party or an offshore alleged employer, a deed of covenant, secondments from one employer company to another or claims of self employment, etc. In HMRC's opinion these arrangements do not succeed in avoiding the tax and NICs due. HMRC will challenge these arrangements and litigate where necessary to recover unpaid tax and NICs.

"Current legislation ensures that rewards and recognition from working for UK-based businesses are charged appropriately to UK Income Tax and NICs. This legislation applies whether the rewards are routed through employee benefit trusts, employer funded retirement benefit schemes or through any other intermediaries, either as loans, transfers of assets or other payments. The legislation will also apply to such third party arrangements where an employment is disguised as self employment or a contractual arrangement.

"Those intent on avoiding Income Tax and NICs by using trust arrangements should also be aware that there could be adverse Inheritance Tax (IHT) and trust tax consequences regardless of whether they themselves set up the trust. These include IHT charges when contributions are made to the trust, when funds are transferred from a trust to a sub-trust or removed from the sub-trust, when uncommercial loans are made by the trustees and at the ten year anniversary of the trust."