Why compliance has lost its meaning for contractors

Not that long ago, I was speaking to an IT Contractor (a web developer) who has received a tax bill for £6000. His accountant recommended running his limited company through a trust-based scheme, and now he's paying for that bad advice.

This same accountant brands themselves as ‘compliant', yet clearly that's not the case. And there're hundreds of scenarios just like this within the contracting world. The challenge is the need for contractors to understand that compliance isn't black and white, there's a whole load of grey.

But for the average contractor, how can you break down the difference between where a particular ‘model’ or ‘tax efficient’ method actually fits on the spectrum of compliance? As a contractor accountancy firm, we spend a significant proportion of our budget on legal fees to ensure our business runs ‘compliantly’ and supports our contractor customers. But the truth is, that there are certain ‘grey’ areas where even the most expensive legal firms would be reluctant to give advice either way.

So, what hope do contractors have of remaining compliant? And how do you decide on the risk to take?

You could read up on all the legislation yourself, seek legal counsel and scrutinise contracts and approaches to find the right one. Or, you have to have an element of trust in your accountant and their approach to ‘risk' and ‘grey' areas. Or, you could do what a lot of contractors have in the past and simply make a decision to maximise tax efficiency with the hope that HMRC doesn't find out.

To help, I think it's important to look at how HMRC perceive various ‘models'. HMRC on their website do clearly state that 70%-80% isn't an unrealistic take-home figure, but models offering higher take-home pay should be scrutinised for their legislative compliance as HMRC have made it clear that it will be unusual for these to be compliant.

Resources such as HMRC's consultation on disguised remuneration are worth reading. But in reality how many contractors are interested in taking the time to scour the depths of legislation to find tax ‘loopholes' to take advantage of? Bearing in mind HMRC are likely to close the loophole within 18-24 months, or, simply take contractors to court expecting them to pay upfront, leaving the contractor to fight to receive their money back in court. 

What’s your risk profile? Do you like working in the grey? Or are you the no-nonsense contractor who’d rather not be looking over their shoulder in case the wrong decision was made?