PSC Invoice to save tax

DullGreyGuy

No doubt something very questionable but can't understand what they are talking about but someone here may have had more patience than me...

Random call from someone claiming to be from an accountancy firm checking I run a Limited Company and on confirming that I do saying they can massively reduce corporation tax and personal tax. Ended the call as quickly as possible but they then emailed an illustration and cannot see what they are talking about. Has two boxes, one for the status quo and the other "with PSC"

Without PSC

Revenue £120,000
Gross Profit £120,000
Expenses £19,200
Net Profit £100,800
Corp Tax £19,152
Dividend £60,000
Personal tax £9,9739.75


With PSC

Revenue £120,000
Purchase (Invoice) £96,000
Gross profit £24,000
Expenses £19,200
Net profit £4,800
Corp Tax £912
Dividends £2,000
Personal tax £0

Clearly the "purchase" is going to be something ropey... wonder if its like the old "loan" based umbrellas that paid NMW and the rest was a loan with the receivable placed in a trust of which you were the trustee of. 

So what new "hmrc approve" scheme is doing the rounds?

Grumpy_chap

You are correct to steer clear from what I can see.  I can only imagine that the "purchase" for £96k is something that somehow gets reverted back to the individual, so mimicking the loan-schemes that were around a few years back and I understand Jimmy Carr can explain better than I.

Presumably, there is no Director salary drawn within the "expenses" line at £19k.  That avoids personal taxation but also means that NI qualifying year is not earned so a long-term loss related to state pension.

Neither summary makes any provision for pension contributions, which is the obvious opportunity to make tax efficient decisions.

The next would be the purchase of an EV by the company and the individual accept the BIK arising.

Jeremy535897

All these artificial arrangements that purport to be something they are not only benefit one person: the one marketing them. You can spend time analysing why they don't work because of legislation, or case law, or GAAR, but  basically it doesn't matter why they don't work. All it means is that you might gain a temporary cash flow advantage in exchange for a whole heap of trouble and losses later on.
Bespoke planning is the key. Whether it is simple stuff like spreading the tax relief on a tractor across two years instead of one, to avoid wasting personal allowances, just by using the cash basis and paying for the asset in two different tax years, or more complex stuff like selling commercial land to your pension scheme and renting it back, there will always be a place for straightforward, commercial transactions that can be structured to take advantage of the tax laws that apply.

DullGreyGuy

[Deleted User] said:

DullGreyGuy said:

No doubt something very questionable but can't understand what they are talking about but someone here may have had more patience than me...

Random call from someone claiming to be from an accountancy firm checking I run a Limited Company and on confirming that I do saying they can massively reduce corporation tax and personal tax. Ended the call as quickly as possible but they then emailed an illustration and cannot see what they are talking about. Has two boxes, one for the status quo and the other "with PSC"

Without PSC

Revenue £120,000
Gross Profit £120,000
Expenses £19,200
Net Profit £100,800
Corp Tax £19,152
Dividend £60,000
Personal tax £9,9739.75


With PSC

Revenue £120,000
Purchase (Invoice) £96,000
Gross profit £24,000
Expenses £19,200
Net profit £4,800
Corp Tax £912
Dividends £2,000
Personal tax £0

Clearly the "purchase" is going to be something ropey... wonder if its like the old "loan" based umbrellas that paid NMW and the rest was a loan with the receivable placed in a trust of which you were the trustee of. 

So what new "hmrc approve" scheme is doing the rounds?

This is probably tax evasion. There are no new schemes doing the rounds that work.  All the ones out there at the moment rely on concealment. 

Under no impression that it "works", it's clearly going to be evasion, just its been many years since the last time someone tried to promote a scheme and so surprised when the call came through. They seem to go in waves so curious as to what is in vogue now. 

Grumpy_chap said:

Presumably, there is no Director salary drawn within the "expenses" line at £19k.  

Actually it was the largest percentage of the expense but below the personal allowance so no tax paid



As to others that have pointed it out... the illustration says its as at 2022 hence the 19% corp tax etc. 

[Deleted User]

[Deleted User] said:

DullGreyGuy said:

Under no impression that it "works", it's clearly going to be evasion, just its been many years since the last time someone tried to promote a scheme and so surprised when the call came through. 

I'd love the name / contact details etc of the people who are doing this so I can dig a bit more.  I'm not employed by HMRC and won't be giving these details / your details to anyone else.  

Excellent earlier post from you - accurate and entertaining. 

Grumpy_chap

[Deleted User] said:

Grumpy_chap said:

You are correct to steer clear from what I can see.  I can only imagine that the "purchase" for £96k is something that somehow gets reverted back to the individual, so mimicking the loan-schemes that were around a few years back and I understand Jimmy Carr can explain better than I.

Things have moved on from Jimmy's day and so he's probably out of date.

The "purchase" is a way of getting money out of the company while "looking" legitimate. 

Thanks - I deleted the bulk of the post for brevity, but aren't all the schemes you referenced really very similar to Jimmy's?

I was once approached by one of these and it was all hinged around the Ltd Co for some reason transferring money to an offshore company in the Caribbean.  The offshore would then make a loan to the Director, but after some period of time the offshore company would be wound up and not call in the loans so the Director avoided tax (because the loan is not income) and it, apparently, still did not fall liable for tax when the offshore got wound up and no longer repayable. 

Apart from the massive and obvious holes in the proposal, the largest thing was the offshore charged a fee for their role which was around 15% IIRC.  For a single-individual Ltd Co as per the OP's example with £120k gross trading income, taking advantage of legitimate tax rules, the overall tax burden might not be massively greater than the 15% fee charged by the offshore for running the scam, but none of the risk of prosecution.

Grumpy_chap

[Deleted User] said:

All these schemes work in similar ways but were said to have different bits of tax "magic" to make them work.  

Isn't the biggest flaw, apart from the schemes not working as claimed from a tax perspective, the fact that the schemes charge a fee - typically around 15% - for the facility and, with sensible planning, the actual tax rate need not necessarily be substantially higher than that.

Consider the OP's example of £120k trading income.

• £12.5k salary, below personal allowance
• £500 dividend, zero tax
• Genuine costs of operating the business - mileage, IT, stationery, office costs.  Say £10k.
• Pension contribution, say £30k.  (Can be £60k per year, or more if carry-forward is utilised, but £30k might be a more realistic long-term level and equates to 25% of gross which would match the best employee schemes.)
• That leaves £67k that is subject to corporation tax 20% = £13.4k
• £53.6k retained profit paid as dividend at 8.75% tax rate = £4.7k

The total tax liability is £18.1k.  That is all through simple processes and with legal options still available to reduce that liability further, for example not all retained profits have to be drawn but can be timed for a lower income tax year.

In the example from the OP, there is the 15% fee (£18k on £120k) to the scheme plus £1k corporation tax still incurred.  (I note that the OP did not mention what fee the "scheme" charges, but I understand that 15% is typical and if the scheme made nothing, there'd be no point in them bothering with the scam.)

These "schemes" really must be targetting the uninformed / gullible with a headline "take home 85%" and referencing 40% (or higher) marginal headline income tax rates and hoping the victim does not realise quick enough that 40% marginal headline income tax rate does not equate to only taking home 60%.

Grumpy_chap

[Deleted User] said:

If I put aside the fact that these schemes don't work, I'm not sure you are right.  

I don't understand how you can think the scheme don't "don't work", and your disagreement on that point seems at odds with your later statement:

[Deleted User] said:

1. Those who think paying tax is above them.  They know full well these are aggresive schemes but they can't be bothered to pay for independent tax advice to find out whether it works or not.  If they did, they'd know it doesn't work and they'd save themselves a lot of sleepness nights.

I will make the further comments on the basis that the "schemes" (however they evolve) do not work.  If the schemes do work, this conversation become moot.

[Deleted User] said:

If I put aside the fact that these schemes don't work, I'm not sure you are right.  Sticking with £120,000:

1. Employee salary: take home is 63.5%
2. Inside IR35: take home is 58.9%
3. Outside IR35 (salary = pa plus dividends but no pension): take home is 65.7%
4. Dodgy scheme: take home is 85%

So if I compare that to someone inside IR35 that is a difference of £8,200-ish per year.  When it all shown to have been ineffective, HMRC will want way more than that.

The value of the Employee Salary might well be higher than the 63.5% assessed as the employee will benefit from employer pension on top (as a minimum).  The challenge is, a contractor charging fees of £120k would likely have a salary below £120k gross if changing status.

Inside IR35 would not seem to align with the premise indicated by the OP:

DullGreyGuy said:

Random call from someone claiming to be from an accountancy firm checking I run a Limited Company and on confirming that I do saying they can massively reduce corporation tax and personal tax.

Inside IR35 is unlikely to be via Ltd Co., but via Umbrella Co.  That achieves a better take home than 60%.


A couple of other comments:

[Deleted User] said:

2. Most people don't think about pensions at that level (£30k per year is quite a lot).  Pension contributions work well when employment income is high but not where there is a dodgy scheme since (if the dodgy promoter is right) there is little net relevant earnings.  But where someone can afford to, and wants to, make high pension contributions then a dodgy scheme is not the way to go.  The annual allowance tapering would also have mitigated against pension contributions for some.

The little net relevant earnings is not important because Ltd Co. and Umbrella Co. options can make employer contributions.  It is only the "scheme" that precludes this.
Many contractors I know make maximum use of pension opportunities.

[Deleted User] said:

3. Your example uses an 8.75% tax rate but with your numbers £16.6k (£53.6k - £37k basic rate band) will be taxed at 33.75% and so that's an extra £4.2k of tax.

Thank you, yes, that is an important factor that I got wrong and my ignoring the higher rate tax band gave an overly optimistic outcome.

Overall, I think the points still stand:

1. The schemes don't work
2. The schemes don't give massively more take-home than a carefully planned operation of Ltd Co.