Failed tax avoidance – the IT contractors story

The IT contractor – Duncan’s story

Duncan is a 55-year-old IT project manager. He’s married with two children and lives in London. When he started working as a contractor, he chose to use an umbrella company to help him manage his payroll admin. He found one through a comparison website. Duncan didn’t ask enough questions about the arrangements he was being sold so ended up in a tax avoidance scheme. This has left him with an unexpected tax bill on top of the fees he paid to use the scheme.

Duncan was lucky as HMRC spotted discrepancies in his PAYE data. That meant we were able to step in quickly. But that’s not always possible, so no-one should ever assume their arrangements are fine because they haven’t heard from us.

I found it on a comparison website

Duncan explains:

I did an online search for umbrella companies and came across a comparison website. I spoke to one of the guys there, filled in a form and he suggested three companies. He said, ‘these people have got this process in place, and it pays this much’. I just chose one of them, they got me set up and that was it.

When I got the letter through from HMRC my first thought was ‘that was quick’. I had only started using the umbrella company a few months earlier, which was still the same tax year. I had a couple of sleepless nights at the start – that was really the worst part.

The warning signs

Duncan wished he had taken more time to consider what he was signing up to and had asked more questions. If he had, he would have spotted the warning signs of tax avoidance. These were:

  • the offer of increased take-home pay when signing his new contract of employment
  • signing a loan agreement in addition to his contract of employment
  • paying a high fee on his gross pay for the umbrella company to set up his new employment contract and calculate his monthly earnings
  • a choice of three complex pay arrangements that all split his monthly earnings into two payments
  • accepting the consultant’s and customer relationship manager’s advice that the payment scheme was vetted and legal without seeking a second professional opinion

HMRC help

I spoke to someone at HMRC and that settled things down. Financially there wasn’t too much impact as fortunately, I hadn’t spent all my money and had saved some of it. Obviously, there was a tax bill which was painful. But by that point I knew it was coming, so I had been able to prepare for it.

What happened next?

Duncan was unable to recover the high fees he paid to the umbrella company totalling £7,600. The umbrella company said he had willingly signed up to the arrangements, agreeing to their payment model and the associated fees. Duncan also had to pay the outstanding Tax of just over £12,000, plus interest because the tax was late.

Everyone is legally responsible for their tax affairs and for paying the correct amount of tax even if they get someone else to do it for them.

Remember, if it sounds too good to be true it almost certainly is. Don’t get caught out by tax avoidance, so:

  • Stop – don’t sign anything that you are uncomfortable with or don’t understand
  • Challenge – check for warning signs, challenge what you see, ask questions
  • Protect yourself, protect others – report tax avoidance schemes to HMRC

These personal stories are published to support HMRC’s Tax avoidance – don’t get caught out campaign.

PAYadvice.UK 1/12/2020

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