Many UK contractors are understandably tempted by various accounting solutions which promise to save them thousands of pounds worth of tax. “Want to take home 85% of your pay?” Of course you do.
However, you may want to think twice – especially considering the existence of retrospective legislation BN66.
BN66 was brought into force in 2008 with the task of clamping down on contractors exploiting tax loopholes through offshore accounts.
The legislation has been controversial in its ability to retrospectively punish contractors who have been using avoidance schemes. In fact, BN66 enables HMRC to collect taxes going back two decades (or to when the original anti-avoidance legislation came into force in 1987).
A landmark case (Huitson/Montpellier) saw a contractor hit with a tax liability of £85,000 going back seven years. This made the legislation a practical reality and a major concern for contractors working via offshore accounts.
So, just how high is the risk? Well, such schemes usually work via some sort of Employee Benefit Trust (EBT) arrangement whereby you get paid a loan which you never have to pay back. Many of these schemes are based on the Isle of Man or Guernsey. These schemes will always promise to be perfectly secure and compliant with UK tax laws.
The problem is that HMRC doesn’t look too kindly upon them and so there’s always a risk that contractors who work via an EBT or similar scheme will be brought to book. As they say: where there’s a will, there’s a way.
The important thing to remember is that if you’re not working in the spirit of the law, you’re probably in danger of falling foul of it.