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UK – Contractor tax avoidance scheme comes under the spotlight

19 June 2012

A tax avoidance scheme has been exposed by The Times today which claims that the taxman loses an estimated £168 million a year.The offshore Employee Benefit tax scheme, known as K2, operates by transferring salaries to offshore trusts such as those based in Jersey, which then lends the money back and as such, the loan is not subject to income tax.

The Times report was part of an undercover sting where a reporter posed as an IT contractor and was promised that the tax bill on his £280,000 salary could be cut from £127,000 to just £3,500.

Many UK staffing firms are believed to have allowed contractors to benefit from this tax arrangement through their relationships with umbrella companies. The Times article is likely to put added pressure on HM Revenue & Customs (HMRC) to make an example of those avoiding tax. HMRC is already entitled to assess staffing hirers for PAYE and NICs if an agency worker has been paid offshore.

Kevin Barrow, Senior Partner at law firm Osborne Clarke said, “The key risk for hirers is that under s689 of the Income Tax (Earnings and Pensions) Act, HMRC have the right just to assess the hirer for PAYE and NICs where the agency worker has been paid offshore. Good staffing companies check this sort of thing out so far as possible. Bad ones don’t.”

One firm using the K2 firm is Peak Performance Accountants which allows its 1,100 clients to pay as little as 1% income tax, the paper revealed. Roy Lyness, from Peak Performance Accountants which run the K2 scheme, was quoted as telling a group of businessmen: “It’s a game of cat and mouse. The Revenue closes one scheme, we find another way round it.”

The UK Government has been trying hard to crack down on such schemes and HMRC said it had done so effectively. But the newspaper revealed that high-profile celebrities, including comedian Jimmy Carr, have been one of the beneficiaries of the scheme and was able to save £3.3 million from the taxman.

The K2 arrangement is just one of a range of tax avoidance schemes continuing to operate, despite the government's vow to crack down on the “morally repugnant” practice. Today’s story comes after the Government published a document for a general anti-abuse rule (GAAR) to put an end to these schemes and which could effectively make all such schemes subject to full PAYE and NICs. 

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