JUST HOW GOOD LIFE IS WHEN YOU ARE
PROTECTED FROM IR35 & SECTION 660A
Anyone with involvement in UK Taxation knows that for UK purposes Avoidance is the legal mitigation of UK Taxation and its ugly opposite Evasion is the illegal mitigation of UK Taxation. In between, there has always been a grey area with extreme avoidance bordering on what the Inland Revenue and the courts may have considered Evasion, now it appears the UK Government and the Inland Revenue are moving towards seeking to label all Avoidance as Evasion The tool for achieving this will be the new disclosure requirements which came into effect from 1st August 2004 but will cover any Tax Saving Schemes promoted or implemented from 18th March 2004.The aims of the new proposals are as follows:
An important point to note about these new rules is that they are not seeking to attack or detect illegal Tax evasion, but that they are aimed at individuals and or companies who have been trying to mitigate their Tax liabilities by using what has been up to now considered legal Tax avoidance arrangements.
It is necessary then, to structure a corporate arrangement that does not fall foul of present rules or even possible future clampdowns.
If a British born individual who is not a UK resident forms a UK incorporated company contemplating running an agency to supply the labour of individuals.The company would not be affected by the provisions of IR 35.
The individuals engaged are not affected by the provisions of IR 35 provided they do not receive renumeration that is not taxed under schedule E.The positioning of a UK company within the corporate structure ensures that the TAX liabilities of any individual engaged by an offshore company and supplied to a client through the UK company are fully accounted for. The client being protected from any TAX claim for the individual. The Director being the individual would ensure that his Tax liabilities were met. As the Shareholders of the AB company would not be UK residents any Professional firm that might be involved in the working arrangements such as incorporation of the AB company and the production of the accounts etc as well as banking would not be held liable to report on their client`s plans.We would therefore suggest that they use our arrangement in order to overcome the present predicament by trading through what we call an AB Co.
A UK AB company is one of which we are the shareholders and the individual is employed by an offshore company and contracted to the AB company to act as the director whilst performing in their chosen discipline. Beating the provisions of IR35 means the income that is earned with the UK incorporated AB company cannot be treated as personal income because they receive their renumeration for their labours from a different source. Their spouse and/or others can be employed in the same way without their wages being treated as their earnings.
Therefore Section 660A cannot apply.The principal activity of the AB company that would be formed is that of a collecting agent acting as principal and agent for an American company and in so doing earning 3% commission. The commission needs to be of sufficient value to cover the running costs of the AB company if any surplus occurs then it would be shown as profit, and corporation tax paid.Profit generated is retained within the AB company`s bank account and can be used to purchase assets for the AB company.The Directors control the AB company and NO Dividend would be declared.A terms of engagement contract is raised between the AB company and the individual`s Employer & monthly invoices would be raised to cover their renumeration indicated later in text.They agree to provide their services through our offshore American company based in Madeira Portugal by whom they are deemed to be employed , because the American company does not have a business address in the UK, it cannot operate Paye therefore they would account for their Taxes etc by Self- Assessment, likewise because the American company does not have a business address in the UK the Secondary National Insurance contributions do not have to be paid see DSS Leaflet (NP16) CA65 Titled Working for Overseas Employers.
The income that they earn through this arrangement is fully accounted to the Inland Revenue in the event that on investigation the Revenue require details of the total income attributed to their efforts, which will show that of the 100% total paid by the client for their services 10 % is our management fee,12.5% the 2nd NIC which is an Employers Liability.So that 22.5% of the total earned is outside of any responsibility of theirs, therefore the company has only to prove that they receive 77.5% of the TOTAL earned renumeration which we adequately do in this manner 40% as income made up of basic salary of £5225 plus the balance as Foreign Dividends.
12.5% which is deducted as the 2nd NIC can be taken by the individual in the form of Tax free Salary Sacrifice paid for by the Employer 20% as Expense allowance Tax free solely and exclusively for business purposes, with receipts or already officially approved exempt payments.17.5 % as Redundancy payment Tax free after each two year period.Continuity of employment is obtained alternating between two American companies.
In receiving a basic salary of £5225 the National Insurance Contribution is 0%, so that although nothing is paid, they are credited with having made a payment, to calculate the value of this Fantastic perk you need to look at the replacement of the State Earnings related pension Scheme ( ie Serps ) by the State 2nd Pension ( ie S2P) .From now on anyone earning at least £4524 per year will be treated for S2P purposes as if they earned £10800 giving them a state pension entitlement worth thousands of pounds over a working lifetime.The benefit is payable even though those earning less than £5225 do not have to pay income Tax or National Insurance giving them a free pension.The system is complex but effectively means that S2P will pay out 40% of the difference between actual earnings ( subject to £4524 minimum ) and £10800, so that on retirement those earning £4524 throughout their working lives could be entitled to S2P payments equivalent to 40% of £6276 a total of £2510 per year.
The benefit is linked to the years in work.
Business people, Self-employed and Freelance who can avoid IR35 and Section 660A could be expected to use this loophole all they need are the circumstances to verify that payment to themselves and their spouses ( if used ) or even other members of family are made.Despite recent court rulings if you trade through our arrangement you can benefit from the use of your spouse and otherıs Tax free allowances together with Tax savings as well as free pensions.
There is no guarantee that S2P will continue in its present form, since all Governments break State Pension pledges, however if at the time of their retirement, the one in power chooses to disregard the pension arrangements and refuse them any payout, they will not have lost money paid into primary NIC.
To summarise our arrangement.
I arrange the Employment of UK residents through the American company which is outside UK Taxation legislation.
Because there is the need to see that the UK resident employees Tax is paid and accounted for to the Inland Revenue a UK incorporated company is formed of which we are the shareholders, to assume that responsibility.
The UK resident employee is named as the Director of that company whose principal activity is that of a collecting agent for the American company and in so doing earns 3% commission.
The UK resident employee is employed by the American company and contracted to the UK incorporated company to act as the Director whilst performing in their chosen discipline, they receive their renumeration from the American company as a Tax free basic wage plus 10% Taxed Dividends with a Tax free wholly business expense allowance together with a sum for Salary Sacrifice Schemes which has been confirmed as legal, to cover Pension contributions, Child care, Dental care and Health care of their choosing which the employer pays for, plus the Tax free (Redundancy payment) end of contract Bonus after two years.
This results in a Renumeration package on which the Treasury has indicated that it can only enforce Tax law on that which an employee earns, a workers right to agree reduction arrangements with their employers is covered by Employment Law which is outside the Chancellor`s jurisdiction.
* to make the Inland Revenue aware of schemes earlier than would normally be the case.
* to enable the Inland Revenue to establish the number of Individuals using the scheme and the probable Tax loss to the Government.
* to understand the mechanics of the scheme and if neccessary, introduce legislation to block the scheme.
I am a Non Resident English UK owner representative of an American company based in Madeira Portugal.