Contractors Warned Over Offshore Solutions

New legislation has highlighted the potential risks, which could include massive back tax bills, for contractors using offshore umbrella companies, say specialist accountants Danbro.

Offshore umbrellas based overseas – including the Isle of Man – have offered contractors up to 85 per cent of their income by operating from locations outside the UK tax system.

However, the Finance Act 2008 introduced measures to prevent tax avoidance through misuse of double taxation treaties for income arising on or after 12 March 2008.

It also introduced legislation that retrospectively cancels the effects of a scheme popular with contractors in which they set up trusts in tax havens, funded with income derived from the UK, receiving payments tax-free due to the relevant double taxation treaty.

Tax could, in theory, be pursued as far back as 1987, with the potential of hefty tax bills. Penalties of up to 100 per cent of the tax due can also be levied for non-payment by HM Revenue & Customs (HMRC).

Elsewhere, the UK and the Isle of Man have signed a new tax information exchange agreement on 29 September – which will come into force once both governments introduce the legislation necessary – which will allow the UK to enforce domestic tax laws by obtaining information from the Isle of Man on tax issues.

Damian Broughton, Danbro managing partner, said: “By using a UK-based specialist in contractor accounting, like Danbro, which is audited, regulated and has received a 100 per cent compliance visit result from HMRC, contractors can have complete confidence that they will be fully compliant with UK tax laws while operating in the business structure that best suits them, with their earnings maximised and administration minimised.”

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