Tax schemes that trap contractors
Individuals working on fixed-rate contracts are eager to reduce their costs, including tax deductions. They may be tempted to take part in tax schemes which promise to cut their tax bills. These are two tax schemes that are sold to contractors, which in reality save no tax at all.
Annuities
The worker agrees to receive a small salary with as little or no tax deducted. The rest of the money they receive is supposedly a capital payment from the scheme promotor, to acquire a deferred annuity. This annuity will be payable to the promoter of the scheme at a future date.
The worker has received a non-taxable capital payment in return for promising to pay an annuity at some date of the promotor’s choosing. This is a version of the contractor’s loan scheme, as the annuity is never actually paid by the worker to the scheme promotor. HMRC’s view is that this scheme does not work.
Loyalty points
Workers are employed by an employment agency, which hires out their services to third parties. The workers are required to advertise their skills on a connected online jobs board.
The agency pays the workers a small wage with little or no tax deducted, and pays the majority of the fees earned to the owner of the online jobs board. The workers are awarded loyalty points for the time their advert remains on the jobs board. They 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 workers should be taxed on the full amount paid out by the agency, 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.
If you are offered similar schemes, remember HMRC will collect any tax apparently avoided, plus interest and penalties.