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A Contractor Asks:

“I am returning to contracting after 10 years of permanent employment. When I contracted before things seemed relatively simple – I simply ran my own limited company as a director taking a small salary and high dividends and that was what almost everybody did. Now there are a multitude of choices including, what some people are referring to as ‘aggressive tax avoidance schemes’. I have tried to do some research and read a lot of forums but the advice is conflicting to say the least. My natural instinct is [link widoczny dla zalogowanych] to want to minimise my tax liabilities but I don’t want to take a risk to far – [link widoczny dla zalogowanych] what should I do?”

Contractor Expert David Colom of DJ Colom &amp Co responds:

The choices available to a contractor have changed almost beyond recognition from when you left your last contracting role 10 years ago. Since then, we have had IR35, Section 660, managed service company [link widoczny dla zalogowanych] 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. More recently, changes in legislation have forced high earning contractors to seek more innovative solutions involving Employment Benefit Trusts (EBT’s) and an element of offshore salary packaging services. 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 [link widoczny dla zalogowanych] company with yourself as director and sole shareholder. The current legislation still allows you to take a low salary and high dividends just as you did 10 years ago, but you do need to keep a spreadsheet of transactions and keep up with all of the accounts, tax and administration responsibilities of being a director of your own limited company. 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 [link widoczny dla zalogowanych] stand. With that relatively simple solution, you will be better off than some alternatives but you will [link widoczny dla zalogowanych] pay more tax than you might under an alternative [link widoczny dla zalogowanych] solution especially if you are a higher rate tax payer.

2. You want a really simple carefree life with absolutely no risk [link widoczny dla zalogowanych] than happy to pay your full share of taxes to help minimize the National Debt.

If that is your priority then you should go for a standard salary umbrella company service and only claim those expenses [link widoczny dla zalogowanych] that you actually incur. 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 [link widoczny dla zalogowanych] 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.

Under current legislation, which is always subject to change, you could consider an offshore salary packaging service in conjunction with an employment benefit trust. 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 [link widoczny dla zalogowanych] “belt and braces” approach to compliance and implementation that you would hope for and expert.

The questioner refers to “aggressive tax avoidance schemes”. This term is really quite subjective and often used in marketing campaigns by opposing providers of different business models who seek to create unjustified fear. It could be argued that the umbrella company [link widoczny dla zalogowanych] 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”. It could also be argued that if you run [link widoczny dla zalogowanych] your own limited company paying high dividends, that is also “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. The paying of dividends in your own company can be risky for example if you do not prepare Board Minutes and Dividend Counterfoils as and when you pay the dividends. You can also risk IR35 arguments with HMRC if you pay yourself dividends. 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. Be [link widoczny dla zalogowanych] particularly wary when speaking to unqualified salesman and especially when reading the comments by anonymous and unqualified individuals making postings on contractor forums.

Good luck in your new contract.