How to spot a tax avoidance scheme, and why you should never use one

To put it bluntly – tax avoidance schemes are evil. They trick you into thinking paying less tax is fine and they’ll help you retain more of your hard-earned money. But what they fail to mention is the fact that if you engage with one, you’ll more than likely face an HMRC investigation at the future, and you could be fined a life-changing amount of money. Tax avoidance schemes may sound like they have your best interests at heart. However, trust us – they don’t care if engaging with them ruins your life.

Any business offering to help you pay less tax is clearly operating unethically. As a UK worker, you’re expected to pay your fair share of taxes and National Insurance Contributions (NICs) – it’s just the way it is! What was the famous quote from Benjamin Franklin? Oh yes, “…in this world nothing can be said to be certain, except death and taxes”. Tax is just part of life.

Spotting a tax avoidance scheme isn’t as hard as you might think. As a UK tax-payer, you know you’re responsible for paying income tax and NICs. Therefore, you know that realistically, using a compliant umbrella company (PAYE) will allow you to retain roughly 55% – 70% of your earnings (depending on your assignment rate). Any company offering you a load more is probably a tax avoidance scheme. The giveaway signs of a tax avoidance scheme include:

  • Ridiculously high take home pay – if you see a company offering you the chance to retain upwards of 80% or 90% of your pay – they’re probably a tax avoidance scheme!
  • Weird wording, such as “IR35 friendly”, “approved by HMRC”, “helping you pay less tax”, etc. These should all set off alarm bells.
  • Unusual location – most tax avoidance schemes are based in a known tax haven, such as the Isle of Man, or the Cayman Islands. If you’re a UK tax payer, common sense should prevail and you should accept that using a UK-based payroll service makes sense.
  • Difficult to get on the phone – a lot of tax avoidance schemes don’t offer phone support. This is probably because they’re based somewhere unusual and perhaps the time difference is a real issue!
  • Logo’s from multinational corporations – we’ve seen some tax avoidance schemes use logos from multinational corporations to try and prove their compliance with tax law. This is mad! How hard is it to copy and paste a few logos from Google and put them on a web page? We know a bit about web design, so let us answer that – not very!

The dangers of using a tax avoidance scheme are severe. We’ve had a firm eye on the contractor payroll industry for years and years, and we’ve seen how tax avoidance schemes operate from afar. Firstly, they entice contractors to register with them. Then, everything seems to be going swimmingly. But this won’t last long, because eventually, HMRC will be made aware that the tax avoidance scheme exists and as a result, they’ll give it a Scheme Reference Number. Once a scheme gets an SRN – the directors will simply close the scheme, hide their involvement, and leave their “clients” out to dry. If HMRC can’t find the directors responsible for setting up the scheme, guess where they’ll look to recuperate underpaid tax? Yes, you guessed it – from you!

Please use a compliant umbrella company

We’re asking nicely – please don’t use a tax avoidance scheme. They’re only out to pocket quick money for themselves and they have no problem throwing hardworking but mislead contractors under the bus! The chances are, if you use a tax avoidance scheme, HMRC will eventually find out and will hold you accountable. If you aren’t convinced – please read up on the Loan Charge. It’s a piece of legislation that allows HMRC to retrospectively punish tax avoiding contractors – years after they engaged with schemes.

We’ve got some useful information throughout out website designed to help you make informed and reliable decisions about your payroll. Check out our Umbrella Companies Explained section, and our short guide on how to Compare Umbrella Companies.

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