By Adam Palin, Financial Times From Gulf News

Those high income individuals using offshore trusts will have to pay up by month end.

London: UK contractors have been warned to steer clear of loan schemes using offshore trusts that promise to reduce their income tax bill, as earlier participants in these schemes have days to settle with the tax authority.

Workers paid through these contested structures before 2011 have until the end of September to resolve disputes worth £430 million (Dh2.4 billion) with HM Revenue & Customs, or face the threat of steeper charges and possible upfront payment demands. HMRC has estimated that about 16,000 contractors — predominantly in IT, banking, and offshore oil and gas — have taken part in the schemes, where employment income is generally routed through offshore trusts and paid in the form of loans, which are designed to be non-taxable.

“The Revenue take the view that it’s a bit of a sham; that you’ve done a job and so you’ve earned taxable income,” said Dominic Arnold, head of tax investigations and disputes at Moore Stephens.

Arnold said schemes often appear “completely legitimate”, pledging to save well-paid participants up to 90 per cent of their income tax bill and purporting to be fully compliant with tax legislation. “The reality is that HMRC does not approve or endorse anything in this area.”

HMRC warned that contract workers targeted by scheme promoters “should think again” before signing up, and added contractor loan schemes to its public “Spotlights” list of structures that it believes amount to tax avoidance.

Arrangements that have featured on this list, including employee benefit trusts and schemes using the business premises renovation allowance, have been the target of the government’s recent crackdown on tax avoidance.

Notices

Last week, HMRC confirmed that £1 billion had been collected from taxpayers involved in disputed structures using so-called accelerated payment notices, which are tax bills that cannot be disputed and must be paid within 90 days of receipt. By the end of 2016, HMRC expects to have issued 64,000 notices, worth £5.5 billion to the Exchequer.

This total looks set to include many taxpayers who do not take advantage of the settlement opportunity for contractor loans, which taxpayers should have registered interest in by June.

Although the window for settling inquiries relating to 2011 and earlier has previously been extended, HMRC insists it will not stretch the deadline again. “The feeling is that this really is the final deadline,” said Arnold. “It’s unlikely you will get a better deal down the line.”

Graham Webber, director of WTT Consulting, a tax adviser, said that the prospect of settling the amounts contested by the tax authority is daunting for many contractors. “Most of these contractors didn’t think they were avoiding tax and so haven’t made any provision for repaying any tax now,” said Webber. “Having to find tens and thousands of pounds is driving them to the wall.”

Disguised remuneration

He said many individuals with disputed tax for their participation before 2011, when the rules on so-called “disguised” remuneration changed, have refrained from settling with HMRC because the courts have yet to side conclusively with the authority’s view.

“There is currently no judicial backing for the Revenue’s view that all of these loans were income,” said Webber. “Until there is a binding court decision, why would you take their word?”

Webber said those who have taken part in contractor loan schemes more recently, since the 2011 changes, will face harsher terms in any settlement they may be able to achieve. “People who stayed in schemes beyond 2011 were either just greedy, or plain stupid, as the writing was on the wall,” he said. “The Revenue take the view that they knew exactly what they were doing [and] they are now very badly advised to stay in these schemes.”

HMRC said those who want to settle tax on a contractor loan, but missed the deadline to register, should contact the authority to discuss their case.

For more on this story go to: http://gulfnews.com/business/money/uk-plugs-contractor-tax-loophole-1.1589223