BN66 - Double Taxation Treaty Abuse
If you are currently using an offshore scheme, or have used one in the past, which avoids paying UK taxes, it is extremely important that you read on!
These schemes work by diverting income earned in the UK through a foreign company/bank account which is then routed back to the UK resident and thus avoids the UK taxation system.
“UK residents are taxable on their income wherever it arises. A wholly artificial scheme seeks to avoid UK tax by artificially diverting income of a UK resident individual to a foreign partnership comprised of foreign trustees.” - Extract taken from HMRC website.
Legislation has been in place since 1987 which has made these schemes illegal. Companies have, however, continued to operate schemes, usually based in Isle of Man or other countries with lower rates of tax than the UK, claiming that UK legislation does not apply to them.
“If you would have been liable to UK tax and NICs had you been employed directly by the client, you must pay UK tax and NICs under these rules, whether or not your service company is located in the UK.” – Extract taken from HMRC website.
The 2008 budget further clarifies the legislation (BN66) and proposes to put a stop to these schemes altogether. If the proposals are made law and you have previously been using an offshore scheme, the implications will be quite severe.
In addition to the tax owed, a penalty of a similar value will also be payable PLUS interest on late payments. Proposals means interest would be charged at 8.5% per annum on any tax paid late.
Your tax liability will backdate retrospectively to when the tax was first payable rather than when the legislation became law.
HMRC are currently suggesting that, to reduce the amount of interest payable, anyone affected makes a payment on account now rather than wait for the final liabilities to be established.
A Certificate of Tax Deposit (CTD) stops HMRC adding more interest to your liability. You can pay any amount you like into a CTD. Whatever you pay in will no longer attract interest.
To stop further interest altogether, you need to pay in an amount equal to your potential tax liability. For example, if your current tax liability is £100,000 and £30,000 is owed in interest, then you need to deposit £100,000 to prevent the £30,000 from rising. However, any amount you pay in will help to reduce further interest.
ContractorUmbrella processes all your income through PAYE so you can rest easy at night and you won’t have the worry about large tax bills or penalties.
For an idea of the outcome, if you were to be investigated by HMRC and had previously been using an offshore scheme, please see our BN66 example.
Our free guides section is an invaluable source of information for both first-time and career contractors alike.
If you have any further questions about BN66 or contracting in general, please either call our new client services helpdesk on 01206 713680 or e-mail info@contractorumbrella.com
