A Contractor Asks:

“I am returning to contracting after 10 years of permanent employment. Now there are a multitude of choices including, what some people are referring to as ‘aggressive tax avoidance schemes’.My natural instinct is to want to minimise my tax liabilities but I don’t want to take a risk to far what should I do?”

Contractor Expert David Colom of DJ Colom & Co responds:

Since then, we have had IR35, Section 660, managed service company legislation and a whole host of tax cases related to those changes.In addition, the whole concept of “umbrella companies” has exploded in a multitude of different providers offering variations on the business model of salary/expenses.With all of those choices, the decision making process is a lot more complex but essentially it boils down to your priorities as follows:-

1. Wish to be master of your own destiny in complete control of your transactions, bank account and all aspects of your business life.

If that is your first and foremost priority then you should definitely form your own limited company with yourself as director and sole shareholder. For that, you would be best advised to engage a specialist Chartered Accountant who will provide you wish a comprehensive service for a fixed monthly fee so you know exactly where you stand.

2. You want a really simple carefree life with absolutely no risk whatsoever and you are more than happy to pay your full share of taxes to help minimize the National Debt.

Do not be tempted to make claims for expenses that you do not actually incur as you might be encouraged to do by some of the less scrupulous umbrella company providers.The concept of claiming “fairy-tale” expenses is tantamount to fraud and at high risk of Inland Revenue attack notwithstanding what some of the umbrella company salesmen will say.

3. Your priority is to minimize your tax liability, not be involved in any administration and minimize risks of HMRC attack.

If you choose to go down that route then it is vital that you take professional advice from a qualified and experienced expert.There are a number of providers in the marketplace of varying quality and provenance, some of which provide a first class and fully compliant business model but sadly others which may simply be an attempt to copy a general business model but without the all important backup and “belt and braces” approach to compliance and implementation that you would hope for and expert.

The questioner refers to “aggressive tax avoidance schemes”. It could be argued that the umbrella company providers offering a “fairy-tale expenses” policy are the most aggressive tax avoiders but they would no doubt argue that any strategy using an employment benefit trust is “aggressive”.

The term “risk” is also widely abused in marketing campaigns and by uninformed and unqualified commentators of various contractor fora. The uninitiated often see “risk” in anything that they do not fully understand or know how to implement in a fully compliant way. Taking “fairy-tale” expenses could also be considered a highly risky strategy in an umbrella company solution.

In summary, you need to consider your options as above and then perhaps talk to a qualified and experienced professional who can give you good advice regarding each of the different strategies available to you.

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