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Contractors in the firing line

Contractors in the firing line as HM Revenue & Customs steps up campaign against offshore tax schemes
Boom in offshore providers post MSC legislation
HMRC could recover debts from recruiters
 
Thousands of contractors who have been lured into using offshore schemes to minimise their tax are facing a clampdown after HM Revenue & Customs (HMRC) won a High Court ruling to allow it recover tax retrospectively, warns giant group plc, the contractor services provider.
 
According to giant group, there had been a boom in the number of offshore providers of tax services to contractors following the Managed Service Companies (MSC) legislation in 2007, which made it much harder for contractors to minimise their tax liabilities by using UK-based providers.
 
Following a High Court ruling last week (28/01/10), however, HMRC is now in a position where it can introduce anti-avoidance measures that apply tax retrospectively. This means that any offshore scheme marketed as legitimate could be made retrospectively illegal, leaving contractors having to pay tax backdated for many years.
 
The High Court ruled last week that an IT contractor would have to pay retrospective tax of 80,000 after HMRC introduced measures in the Finance Act 2008 to close a loophole to prevent contractors receiving income offshore via a trust at a taxable rate of 3.5%. Several thousand contractors are likely to be affected by the ruling, many of whom could now face bankruptcy.
 
Matthew Brown, Managing Director of giant group, comments: This ruling sends a clear signal that if tax arrangements are blatantly artificial, they can be taxed retrospectively. Even if a tax scheme exploits a loophole in current law the risks of using it are still very real. As a general rule, if a tax scheme sounds too good to be true, it probably is.
 
Numerous providers of tax services to contractors operate offshore. Contractors and recruiters need to be wary about dealing with these providers as the risk of retrospective measures from HMRC has significantly increased.
 
He adds: Contractors could try to persuade HMRC to collect outstanding tax from scheme promoters, but this may not be possible, in which case recruitment agencies could also be in the firing line. HMRC has already shown its willingness to include debt transfer provisions in anti-avoidance legislation, so in cases where it believes debts will be unrecoverable from contractors, recruiters could be targeted if schemes are deemed to be MSCs.

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