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What
are your payment solution
options? |
| |
Her
Majesty's Revenue &
Customs (HMRC) have closed
a number of loopholes that
previously allowed contractors
to minimise their tax and
National Insurance contributions
(NICs). They continue to
investigate some of the
practices used by contractors
and may examine your individual
contracts. Therefore, as
a contractor you need to
be very careful when you
choose your payment solution.
Traditional options have
included: |
|
Limited
Liability Partnership |
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Consisting
of several contractors formed
under company law, a Limited
Liability Partnership reduces
NICs by saving employers'
contributions and offers
greater flexibility in terms
of expenses. |
|
Umbrella
Company |
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Contractors
are paid via PAYE and benefit
from an HMRC approved dispensation
for expenses. If a contractor
is outside IR35 this is
a less tax efficient solution. |
|
Composite
Company |
| |
Legislation
introduced in April 2007
to prevent what the government
viewed as 'tax evasion'
means that this option should
not be pursued. This type
of company offered administrative
and payroll services, paying
a small salary plus expenses
with the remaining income
paid via dividends. |
|
Personal
Service Company |
| |
The
sole director/shareholder/contractor
is paid via a small salary,
dividends and expenses.
HMRC can challenge this
method if it is felt stipulated
procedures are not being
followed, so this is a risky
option and is not appropriate
for contracts inside IR35. |
|
Managed
Service Company |
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Under
new legislation this type
of company can only pay
contractors on an employed
basis with limited allowance
for expenses. Agencies working
with a managed service company
now run the risk of liability
for any unpaid PAYE or NICs
|
|
Bonus
Scheme |
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Income
is received in the form
of a low basic salary and
several bonus payments,
all of which are subject
to PAYE. Whilst reducing
the employee's NICs on the
bonus and deferring payment
of some taxation, for contractors
inside IR35 contracts the
deferred taxation is subject
to PAYE, resulting in a
less tax-efficient solution.
|
|
Offshore
Scheme |
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Money
is held in offshore funds
with payments made in the
form of distributions, loans
and dividends. UK residents
must declare this income
which is subject to taxation
and IR35 criteria. |
|
Foreign
Currency Loan |
| |
These
work in conjunction with
an offshore company and
are a way of avoiding tax
and NICs with repayments
made at a very low rate,
resulting in a tax-free
gain. Such companies are
closely scrutinised by HMRC
and all dealings involving
a UK resident would be taxed
as income. |
|
Employee
Benefit Trust |
| |
Once
an attractive option as
it avoided IR35 and taxation,
this type of scheme can
no longer operate after
HMRC closed the loophole
it exploited. Contractors
were paid a low basic salary
with the balance paid into
an offshore trust from where
it was loaned back. |
|
PAYE |
| |
Contractors
work through an employment
agency receiving all income
via PAYE thus avoiding the
entire IR35 issue. However,
by paying the agency's fee
contractors receive less
than they would using a
dedicated payment solution
and may be missing out on
other benefits and allowances |
