Offshore Tax Avoidance Schemes

Many contractors choose to take advantages of methods to increase take-home pay and reduce the amount of tax paid on income. One such method which gained attention for a period of time was through offshore tax avoidance schemes. These were tempting, but a risky alternative for limited company directors to take home up to 95% of their income.

What is a tax avoidance scheme?

An offshore tax avoidance scheme is a structure which is set up for the sole purpose of reducing income tax and increasing pay by taking advantage of loopholes in the rules.

Are offshore tax avoidance schemes worth the risk?

Offshore tax schemes were presented as a tempting way to save money, with returns as high as 80% plus, but are they really worth the risk?

If you live and work in the UK then it's necessary that you pay UK taxes. There really is no legal way of avoiding UK taxes. If you pay into an offshore tax scheme, it's inevitable that HMRC will catch up with you.

This doesn't mean you shouldn't seek to operate in the most tax-efficient way possible. The most tax-efficient way of working in the UK is through your own limited company.

How to avoid tax avoidance schemes

You should be cautious of companies who promote unrealistically high returns - all UK accountants are bound by the same government regulations and tax laws. Therefore, on the whole, providing they know what they are doing, your take-home pay from one firm to another should be roughly the same.

Of course, it is best to seek an accountant with specialist knowledge and experience in supporting contractors. Your local accountant may provide excellent advice to local shop owners, tradespeople and SME’s on industrial estates but contractors needs and ways of working are unique. It, therefore, makes sense to appoint a firm that specialises in the contractor market.

Offshore tax scheme warning - Royal Court of Justice ruling

If you have once used or are thinking of using an offshore tax scheme as a way of avoiding UK tax, carry on reading.

On Thursday 28 January 2010, the Royal Court of Justice ruled the retrospective effect of BN66 is not unlawful.

This means that HMRC can now go back in time and retrospectively apply a piece of tax legislation which will affect thousands of contractors who either once used or are still using an offshore scheme as a way to avoid paying UK taxes.

HMRC can now go back as far as 1987 (which is when BN66 was imposed), so even if a contractor used a scheme in 1987 for one day or one year, they may now have to pay both fines and backdated taxes.

This news further supports the fact that contractors should think very carefully before using offshore schemes as a way of avoiding paying UK taxes.

So are offshore schemes worth the risk? No.

If you traded through your own legitimate UK limited company your returns would typically be 75% - 80%. To find out more about how you could benefit when you work through your own limited company, get in touch.

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