Should anybody be using an off-shore scheme?
You may know them by another name, such as an EBT or trust-loan scheme and the mechanics of them are fairly simple :-
You go to work > your “client” pays your salary into a trust (somewhere like the Isle of Man) > The trust “lends” the money to you.
The principle idea behind all of these schemes relies on the monies paid to you, being treated as a loan and not as earned income. As the income has not actually been earned, you don’t pay tax on it. It all sounds very genuine and the glossy sales brochure will attest to a QC having reviewed the whole system and given it a green light.
Rather than go through the legalities of this type of scheme, which is very subjective and open to interpretation, we will look at the human impact instead.
We receive frequent contact from people that have utilised these schemes and are currently being investigated. The real issue here is the impact this has on their daily life and also their close family. An investigation of this type regularly exceeds 2 years , with a considerable volume of correspondence between HMRC and your scheme provider. Before you decide if an off-shore scheme is right for you – take into account the time you may have to put aside to spend dealing with questions from HMRC. Also remember, when an investigation starts – HMRC are not simply going to forget about you if their letters are not answered.
Secondly – there is a another side to these schemes rarely mentioned. You will pay between 10% to 15% of your gross income to the scheme provider as a “commission”. This is not a payment of your tax and does not form part of the double-taxation treaty legislation we have with these tax havens. Consequently – when your investigation starts, HMRC usually give the option for the tax payer to settle the claim immediately. Bear in mind – the commission you have already paid will not count towards your tax liability later on. It is essentially spent and you then have the total tax liability to contend with.