Avoidance Scheme Alert

HMRC has recently published Spotlight 12 on their website entitled, 'Taxing the rewards for work carried out for a UK based employer'.

The department say that they are aware of new tax avoidance schemes that seek to avoid income tax and NICs by circumventing the new disguised remuneration rules. These schemes are being aimed at contractors, highly paid employees and those using recruitment agencies.

These schemes involve arrangements which may use 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 to name but a few characteristics. In HMRC's opinion these schemes do not work in achieving their objective and they will challenge such arrangements and take legal action, where necessary, to recover tax and NIC arrears.

Legislation currently exists to ensure that rewards and recognition from UK based employers are taxed appropriately, regardless of whether the rewards are channelled through employee benefit trust (EBT), employer funded retirement benefit schemes or through other mechanisms such as loans, transfer of assets or other payments. The legislation also applies to third party arrangements where an employment is disguised as self-employment or a contractual arrangement.

Later this year HMRC plan to publish final guidance on disguised remuneration in its Employment Income Manual. The legislative provisions only apply to schemes that use a third party such as a trust, individual or company and will treat loans, money or other assets held in trust (EBT) but linked to an individual as PAYE income. Although legislation came into being on 6th April 2011, it can be backdated, in some cases, to 9th December 2010. HMRC has also clarified that the disguised remuneration rules apply to NIC as well.

In all but limited cases, the use of EBT's as effective tax planning will cease.

Anybody still intent on using trust arrangements to avoid tax and NICs should also be aware of adverse inheritance tax consequences regardless of whether or not they themselves set up the trust.
 

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