Contractors' Questions: Can I get 90% take-home pay via an accountant?

Contractor’s Question: I’ve seen adverts by accountancy firms offering me ‘up to 90% take-home pay.’ I’ve asked one of the firms and they say that, fortunately, their scheme doesn't involve using offshore entities but does involve using a charity and some complex accounting. I’d like to know how reputable such a firm might be, or are they not -- in that I would likely face a tax investigation if I pursued this line of accounting and accounting representation?

Expert’s Answer: As a general rule, if something sounds too good to be true, it probably is. Contractors need to be wary of accountancy firms promising 90% take-home pay. Depending on the level of income generated by the limited company, minus expenses, on average a contractor could take home around 75% - 80% of an invoice value. The basic rate of corporation tax is 20% and the basic rate of tax for dividends is 7.5%, so it’s very clear to see that 90% take home pay does not add up, particularly when you factor in the scheme provider’s cut on top.

There are a significant number of accountancy service providers, many of whom are based offshore, that advertise much higher take-home pay and claim to be fully compliant. It is difficult to give specific advice about the scheme you mention without the full details. However the thing to bear in mind is that, contrary to whatever claims are made on a website, HMRC never authorises tax avoidance schemes. Providers often try to pull the wool over client’s eyes by citing the scheme reference number issued by HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules. But HMRC never approves schemes, so all the reference number means is that the provider has complied with its legal obligation to inform HMRC that it is touting a scheme.

Even if HMRC does not look too closely at a scheme to begin with, that should not be taken as a sign that HMRC thinks the scheme is legitimate. Historically, users of tax avoidance schemes were allowed to hold onto the disputed tax until the case was resolved in court, which could take years. HMRC now has the power to compel scheme users to pay disputed tax upfront before the courts have ruled (Accelerated Payment Notices). These new powers have already been used against contractors. HMRC has been sending demands to contractors, in some cases asking for tens of thousands of pounds in disputed tax relating to work completed years ago. Contractors have been given three months to pay any tax that HMRC claims they owe. If the courts subsequently decide in the taxpayer’s favour, the money will be refunded, but that process can take months or even years.

Contractors who live in the UK, work in the UK, and get paid for work they do in the UK, are liable for UK taxes. Working through your own UK limited company is and has always been the most tax-efficient way of working legally. Schemes whereby contractors are paid through charities or offshore vehicles should therefore be treated with extreme caution.

The expert was Jaime Thorpe, client liaison manager at contractor accountancy firm SJD Accountancy.