tax avoidance - not just footballers

[Paul88]

www.telegraph.co.uk/news/newstopics/politics/conservative/8306003/David-Camerons-new-spin-doctor-and-his-tax-avoidance-plan.html

Great to see the telegraph drawing attention to this oh so common scam of people avoiding tax by pretending they are a company offering services when really they are just an individual working for a single employer.

Instead of paying income tax and national insurance they just pay corporation tax at 21%, soon to be reduced to 20%. And the employer avoids employers' national insurance.

She is avoiding over £20000 in tax each year.

Shall we see whether this gets discussed on newsnight when Paxman is doing the same thing...

There are risks involved with being a freelance operating as a sole trader or a company rather than as a permanent employee. No job security or holiday entitlement, for example. No redundancy deals. My friend's DH is an owner-driver for a parcel delivery company.... has to employ an accountant to deal with his tax and VAT returns, keep receipts etc. It's not exclusive to footballers or journalists.

So how do they get their money out of the company? Dividends? I think these incur national insurance and they then declare them as income on a personal tax return - thus paying income tax.

It's not a scam at all Paul and you full well know it.

There is nothing wrong with structuring your tax affairs to minimise your tax liabilities so long as you do so legally.

Besides which, Labour introduced IR35 in 1999 to prevent people avoiding tax as disguised employees. Now to be able to do above, the limited company has to be able to demonstrate they are not simply a disguised employee. So for example, one test is if the company has multiple customers, or multiple employees.

It is a scam and I well know it.

It is not illegal.

Whether it is 'wrong' is a matter of opinion.

It is a way that the rich get to pay less tax and I and very many others would prefer they pay their share and save us from these disastrous cuts.

The case above is a classic one of a single person offering services to a single company - she is not allowed to work for anyone other than the BBC and nor is Paxman. They escape IR35 by going through a limited company instead of being a sole trader.

@ellina - no, no national insurance on dividends at all - either employers or employees. The company saves 13% and the individual saves 11%. Zero tax payable on the first £37000 of dividend income then 22.5%. Much lower rates than people being paid as employees.

IR35 was expressly set up to prevent people from using limited companies to avoid paying income tax by paying themselves big dividends. So a limited company in itself isn't a license to dodge tax. Otherwise we'd all do it.

Sole traders cannot pay themselves dividends so thats a moot point.

Now I don't know for sure what they earn and whom their customers are and I'm pretty well sure you won't know for sure either. But assuming they're not being chased by the taxman then they've satisfied the criteria HMRC dictate.

Frankly as long as what they do is legal then it doesn't really matter whether you personally think its right or wrong.

Why is it though that you have such a beef against people minimising their tax liabilities legally? You always seem to be banging on about this.

If you get a parking ticket and offered a discount if you pay within 14 days, do you pay the full amount on principle, so the poor don't go without? Or do you take advantage of the reduction and move on?

Am really angry the rich continue to tax avoid while we get our child tax credit taken away.

If you've set yourself up as a limited company then you charge VAT to your clients - I've done the math and the government gets the same in tax revenue from my husband as if he was under PAYE because of the VAT. Actually the only party benefiting is his main client - who doesn't have to take on the risk of an employee. So can we stop bashing people who have limited companies (in general - not complaining about this specific case as they're in the public eye)?

Also to avoid issues with IR35 my DH runs around getting a few other contracts a year to make sure we're following all the rules too. It's not always easy and I'm sick of it being assumed to be a tax dodge (not saying that some people don't fiddle the system but most of us don't!).

Actually, it's a very common thing in my area and there's three guys on the street who are limited company outfits. None of them (including us) is paying their spouse for help because it's not worth bending the rules - I know someone who was investigated by HMRC (and was fine, did everything properly) and the general consensus is that it's not worth it.

Limited companies don't have to be VAT registered, only if their turnover is above the threshold. You can register voluntarily, but it's not required as a prerequisite of being limited.
Just clarifying for anyone reading....

@abdnhiker - yes you collect VAT from clients, and pass it on to HMRC. But this isn't instead of income tax - it is supposed to be as well.

My beef is about an unfair system more than the people who take advantage of it. Why should those who can afford accountants be allowed to squirrel money away and not pay tax on it when those with less are paying their share?

It is that this government is choosing to do massive damage to our countries infrastructure: the NHS, our schools, social services etc etc. And it is making changes to housing benefit amongst other things which will destroy the lives of many of the poorest in the country, forcing them out of their homes. And it claims that there is no choice.

I like most other people in this country would like to see tax avoidance loopholes closed, especially those that the banks are taking advantage of.

But the millionaires around the cabinet table are choosing to keep their mates in clover and do in the rest of us. Cutting corporation tax. Not extending tax on bankers bonuses.

And it is a choice; there are alternatives.

And they don't even have a mandate.

If there was a geneeral election tomorrow they would be out and good riddance.

As for the taxman chasing people - the tories are cutting the HMRC. Inspectors who on average bring in 10x their salaries are being made redundant. That is not to save money it is just ideological shrinking the state.

And as for non doms - I think it is time for a non dom thread...

Agree with you Paul. Just been talking about this on another thread. It's about time the tax loopholes were closed and the whole system was made more transparent.

Two hospitals in London are about to lose 1000 jobs. There is a connection.

Another poster wrote that the tax avoided by small and medium businesses had a large part to play in this.

Some interesting points being made on the Is it legal? thread by CinnabarRed, btw.

the real question on avoidance/evasion is does the law need changing,

Nick Clugg keeps mentioning it briefly, but never gives details.

Barclays may want the law to stay the same.

we are starting to see the ethics(?) of a millionaires Cabinet writ large.

Vince looks driven into the ground by the situation

And the Mail and the Torygraph would like to break the Coalition (They dont even like right wing liberals)

Its not uninteresting. Blair started publicity stunt government and Camerooney is
advancing it. "Gabby" PS I wonder what Mrs Logan makes of situation?

Paul88 but a salaried employee doesn't generate vat. When you add the vat with the income tax my dh pays on his salary and dividends then it is the same as if he had the same net income as a salaried employee.

The threshold for vat registration is a relatively low company turnover I think - we were on the limit when dh first went this route and he was by no means one of these ultra high earners (it's way less than 100k per year).

Basically can we please stop bashing people who have limited companies? It's labelling all of us unfairly as tax avoiders and "wealthy".

But by all means review legislation to close loopholes! It's a minefield of contradiction at the moment.

VAT is paid by consumers, not employees or companies.

The VAT registration level is about £70,000; it basically allows micro businesses to be spared a lot of paperwork and allows them a bit of a competitive edge against larger outfits as they don't have to charge VAT - although unlike the larger outfits they do have to pay it.

Once a business is above that size, it collects VAT on everything it sells and passes the difference between that amount and VAT it has already paid to HMRC. This is true whether it pays its staff as employees or via dividends.

Just because businesses collect VAT for the HMRC does not mean they are generating that revenue - VAT costs them nothing.

Vat costs us "nothing" but if my dh was a salaried employee then the government would not be getting it, hence why I think it should be included in any sort of comparison of the revenue he generates for hmrc compared to a salaried employee.

The reason I keep returning to these threads is because I'm genuinely concerned that there seems to be a view that you're somehow avoiding tax by being a limited company. It is not fair or true for many of us and I'm sick of hearing my dh lumped in with the wealthy tax avoiders who can move money around in ways we wouldn't. There are options to run companies out of jersey etc and that is an effective tax avoidance measure that hmrc needs to clamp down on somehow but simply having a limited company is not! It's really upsetting for those of us who are following the rules to the spirit as well as the letter. Can you understand that and qualify your statements?

Sorry but you are wrong about the VAT. If he was an employee the company would still have to collect VAT. Even if he was a sole trader with turnover above £70k he would have to charge VAT.

Being a limited company is not in itself a way of avoiding tax, but paying yourself through dividends instead of a salary or even as a self employed contractor for the company is a way of avoiding tax.

I know because I do it too.

After many years as a sole trader my biggest customer decided it needed to put the work I do for it out to tender, and I only stood a chance of keeping the work as a limited company bidding for it. I got the contract. All of a sudden I needed an accountant having always done my own books - and he was very clear:

Option 1 was to be an employee - the company pays employers' NI; I pay income tax and NI through PAYE; extra admin costs of running a payroll.

Option 2 was to be a self employed contractor to the company to avoid employers' NI and admin costs - but I would be in breach of IR35.

Option 3 was to pay myself through dividends. This is least admin and most 'tax efficient' - i.e. I pay least tax.

Now for me, the amount of tax I am saving is probably no more than £4-5k per year and a good chunk of that goes to the accountant.

I am hoping the company will grow - at the moment it is just me and a few others, the others just do small chunks of work on a self employed basis. If it does grows and I am not a one man band any more it will be much better for the company to pay us all a salary.

I feel a little bit guilty, but not very guilty. The money I take out of the business is, after my reduced tax bill, is about equivalent to someone getting £70-80k in a salary. To me that is a good salary but I work very hard for it.

So although this is a form of tax avoidance I don't think it is a terrible thing to do - and the HMRC is very aware of it and also doesn't worry too much about it.

However

I do think it is wrong that, as in the original link, someone takes £150k in this case, no doubt much more when it comes to Paxman / Marr others - and even though they are working exclusively for one corporation, and a publicly funded one at that, they channel the money through a limited company to avoid tax. Yes they miss out on redundancy / maternity rights but they can easily afford to save for such eventuality. The BBC is avoiding NI payments and they are avoiding tax and NI and I think cases like this go across the greyish fuzzy line between right and wrong.

Your DH and I may be near to that line or even somewhere in the middle of it but lets worry about the real villains here.

Of course the torygraph is only publishing this to have a go at the BBC - I think the BBC is wonderful but I think this practice should be stopped - all their people should be on PAYE and the overpaid ones should be allowed to go elsewhere if they want.

one-man-bands can save significant amounts of tax by putting the business through a limited company, via the payment of a small salary and then dividends (preferably split with a non-working spouse to utilise 2 basic rate bands before higher rate tax).

If they should be under the IR35 rules then they are evading tax by not applying those rules. And if they do apply them then the aforementioned tax benefits are largely no longer applicable.

If IR35 doesn't apply to them then they are simply structuring their affairs in the most tax efficient way.

I wish I could put my services through a company and sell them to my employer, it would save me a lot of tax.

Chasingsquirrels - you can't pay your spouse any more. That loop hole was closed in 2008.

Paul88 - I agree that there is no way the BBC should be paying self-employed contractors the way they are and I'm glad to see of being pointed out. Also, my dh makes a bit less than yours and pays himself a decent salary as well so his tax bill is probably closer to paye than yours is. If you do this yourself can you see why I'm so frustrated that it's been described as tax avoidance?

Btw the extra admin costs of running a payroll are absolutely zero. I run dh's (for free - we are not paying me for it because we've been advised it's a bit of a grey area) and I also run one to pay our nanny. It's very straightforward and hmrc have always been helpful with questions.

Just to clarify - do you pay yourself entirely through dividends? You must run a payroll - our accountant described having a minimal salary as pushing the limits of the regulations. That sounds very dodgy and is tax avoidance - you must be paying yourself a salary as well?

Paul88, although I agree with much that you say i think you will find Marr and Paxo are not solely employed by the BBC, both are also published authors and both do paid speaking at conferences and write for newspapers/magazines.

your spouse can own shares and receive dividends though. And if your spouse is a director then they can receive remuneration for holding that office.

you don't have to pay yourself a salary either - as a director, without a contract because having one would bring you into national minimum wage regulations, you aren't an employee but an office holder and there is nothing to say you have to take a salary.

The reason for taking a salary is that at just under the personal allowance you aren't taxed on it, but the company gets corporation tax relief (which it doesn't on dividends) and you get the NI credits towards your second state pension.

Chasingsquirrels - all the guidance we've received from two different accountants suggests that paying a spouse dividends is no longer acceptable to hmrc and it opens you up to potential problems. You might get away with it but when I was a sahm we were advised strongly against it if we wanted to ensure compliance.

Similarly for not paying yourself a salary. I don't know anyone who does either of these things because it's a grey area and most of us choose to play by the rules and not risk hmrc claiming unpaid taxes from years back.

(yes a minimal salary of just over the threshold for NI can be a tax benefit but our accountant recommends paying around 25 K as a minimum to avoid hmrc questioning things).

So I'd guess most of us aren't costing the country any tax revenue since what's being described here is not common practice in our circle of aquaintance. We do know one guy who perhaps crosses the line but he's by far in the minority!

Do your contacts fall under IR35?
If not then I would honestly say that you have been poorly advised.
The 2008 change which you refer to is presumably the Arctic Systems case, which in no was stops a husband and wife each having a shareholding in a company and each taking dividends on these shares.