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Banks clampdown on loophole that allows contractors to pay just 10% tax


Some might say that banks have been slow to clampdown, but offshore umbrella companies – still used by hundreds of contractors in the City to allow them to take home up to 90% of their income – are set to go the way of the dinosaur.

Banks with armies of contractors in the City including Lloyds, Barclays and Royal Bank of Scotland have told recruiters in recent weeks to close the loophole that allows temporary employees still operating under an offshore umbrella companies in order to avoid huge amounts of income tax. This still amounts to hundreds of people, largely long-term contractors at one organisation who may have been able to slip through new rules clamping down on the practice, suggest recruiters.

In October last year, HMRC updated legislation that sought to eliminate offshore umbrella companies which help contractors avoid income tax and national insurance contributions. Effectively it meant that contractors would receive payment direct from recruitment agencies who work with the end client. They become responsible for deducting tax and NI, so the benefit of using these umbrella companies is lost.

It’s been slow to take full effect, and banks are only now telling recruitment agencies to get their houses in order and ensure that contractors can no longer use offshore umbrella companies. “Banks are telling us to ensure that all our contractors are compliant, and this affects a lot of people across the City,” says one recruiter who declined to be named. “A lot of people have been using these companies for years, so it will drastically impact their take home pay.”

Contractors are still free to use UK-based umbrella companies like Parasol or Giant, which take the headache out of tax calculations but offer nothing like the tax breaks of the offshore firms. Most contractors in the City earning over £500 a day usually set themselves up as limited companies anyway, suggest recruiters, which is still viewed as the most tax-efficient way of working.

Contractors have typically been among the most active in seeking out ways to comply with the spirit, rather than the letter, of the law when it comes to income tax payments. However, the UK government’s Targeted Anti Avoidance Rules (TAAR), within the Onshore Intermediaries legislation coming into effect this month, is aimed at ensuring all possible loopholes are closed.

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Barclays has rolled out another 10% rate cut for all contractors in the UK and U.S.

Comments (1)

  1. HMRC have taken the correct stance however some of the sophisticated players in the market will still try and dodge the system. For example, one ‘unnamed’ solution utilises a Ltd company receiving the funds, which ticks the compliance box for the agency and end client, BUT the funds are then transferred to an offshore self-employed benefit trust, which performs the usual loan backs.

    This is therefore making it even harder for quality Agencies and the Banks, to gain a truly honest and open view of the actual strategy being adopted by the end contractor, unless they amend their onboarding compliance and add in an annual compliance check!

    I would agree with the comments made that a company like Giant should be used, if the contractor is on a modest day rate or operating inside IR35. However if outside IR35 and earning the £500 noted, a Ltd company must be considered for several reasons :-

    The £2,000 NIC rebate (or proportion of, depending on salary)
    The benefit of Flat Rate VAT which on £120,000 could add £3-5,000 to the top line
    The ability to have more tax control

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