With the recent press reports surrounding the operation of tax minimisation structures, the humble contractor has come into focus once more. What is for certain is that it is becoming increasingly more challenging for the contractor to decide how they should arrange their affairs to be as tax efficient as possible whilst understanding the corresponding tax risks.

There are some key points that a contractor should ask themselves if they are considering anything other than a straight forward PAYE arrangement with an Agency.

Do I want to take a risk with my tax affairs?
One thing that any tax mitigation strategy will involve is an element of risk. There are various degrees of risk of course; indeed operating through an employment agency itself may carry an element of risk if they are operating expenses dispensation model albeit lower that conducting your affairs through a structure that HMRC have already tried to legislate against (i.e. using loans). How much risk should be taken very much depends on the personal preference and circumstances of an individual. Many years ago I was asked to advise on a tax arrangement which effectively allowed monies to be taken from a company tax free into the hands of a director. The arrangement legally worked, but when the director suggested he was going to borrow against his house to fund the arrangement I suggested he might want to consider the risk if it all went wrong. Fortunately he did and actually did not participate in the scheme at all.

Who is at risk if it goes wrong?
One thing for sure is it will not be the directors of the limited company overseas who will be feeling the heat from HMRC. HMRC really don’t seem to want to affect the people who would be your end client either. Take IR35 legislation for instance, in a normal self employed relationship if there was a dispute over status then it would be the alleged employer who would have to fund any liabilities if the status was proved to be that of an employee (subject to what any contract between the two parties said). Not so under IR35 where it is the personal service company who would need to fund tax and NI payments.

I’m not put off by the above, so what should I look for?
If you decide that you would like to take a risk on operating through a tax structure then you should consider the following:

• There are viable tax mitigation strategies, but be prepared to be bombarded with a few that are not. 
• Ask what tax advice qualification the person selling the scheme has, and ensure that they let you know what the risks are.
• If the scheme depends on your employment status, critically ask yourself if you really would be self employed.
• Ask what support would be given in the case of an enquiry into your personal tax affairs, almost all strategies will have been disclosed to HMRC, and this is no guarantee that HMRC will not challenge the strategy, but at least they will have been made aware.
• Make sure that the structure is implemented in the right way, i.e. if there are certain things that you must do ensure that you do them. Many strategies would work but for the fact that key steps or paperwork are either missing or short cut and therefor don’t reflect the reality of your working relationship with your client.
• Always get a second opinion from a professional, more than likely they will not be able to give you an answer of whether the strategy works or not ( since they are unlikely to be allowed access to various counsel options and legal documents) but they will be able to advise you of what risks you are taking.

Defending a case
Most tax reduction strategies will say that they are back up by a fighting fund or something similar It would be sensible to ask where this money is located and if it is ring fenced, also ask what type of enquiry the fund will pay for and to what level. If everything went against you it’s possible for you to have to pay the tax, interest and penalties.