UK Tax Authorities To Swoop On IR35 Avoidance Schemes

by Caroline Maxwell, Tax-News.com, London

30 July 2001

According to recent reports, the Inland Revenue's Special Compliance Office is gearing up for a crackdown on offshore umbrella companies and other tax avoidance schemes designed for solo contractors caught by the unpopular IR35 legislation.

Recently, there have been slightly hysterical reports of a Liverpool based 'hit squad' taking a particular interest in offshore tax sheltering arrangements. However, an Inland Revenue spokesman claimed that this was a little overstated, and although there were 'one or two' people working on it at the moment, IR35 is just one of the areas that they will be looking at.

However, experts are doubtful, and believe that the Inland Revenue's SCO is merely delaying its swoop in order to allow unwary contractors to extricate themselves from the schemes so as to better pursue the hardened tax evaders. Ann Redston, personal tax chairman of the Chartered Institute of Taxation is concerned that contractors are not always aware of the implications of their actions, and may unwittingly place themselves in a vulnerable position. 'The problem for some of these schemes is that people in them believe they genuinely avoid IR35,' she explained. 'Some schemes will crumble when examined and what worries me is who gets hurt.'

Peter Howarth, director of tax investigations at Tenon Group agrees, arguing that the complexity of the law is not fully understood by many: 'Individual contractors may genuinely think they are in some kind of scheme that works. It will be promoted by professionals and everything will be logically explained. That could seem OK,' he observed. 'But it's only when you know IR35, tax legislation and case law that you have the wider picture of experience.'

Both Redston and Howarth advise UK contractors looking to minimise their liability under IR35 provisions to seek professional advice before entering into any kind of scheme. Howarth also feels that both existing and potential participants in such umbrella companies should be wary about where their money is going, particularly if it is being paid into an offshore bank account. 'In the industry we work in, we all have tales to tell of people who stuff money offshore and someone runs off with it. I'm not sure I'd like my salary to go to someone offshore,' he mused.

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