A tax tribunal ruling banning UK and expat contractors collecting their pay as foreign currency loans through offshore umbrella companies will cost freelancers millions in unpaid tax.
HM Revenue & Customs is already demanding the cash from around 15,000 contractors and freelancers who collected their income as forex loans.
HMRC expects collect at least £400 million in income tax and national insurance contributions following the ruling.
The tax avoidance plan was packaged for contractors by Consulting Overseas Ltd as a fool proof method to save handing huge amounts tax to HMRC.
To avoid tax, contractors were employed by Isle of Man company Sandfield Consultants Ltd, and were paid up to two-thirds of their income as loans in foreign currencies like Romanian lei, Byelorussian roubles or Uzbekistani soums.
Currency trades
The company then put the loans into currency trades to turn employee earnings into non-taxable foreign exchange gains.
In a test case against one contractor, Phillip Boyle, the first-tier tax tribunal rejected his arguments that the strategy was a legitimate tax avoidance scheme. He appealed the ruling and lost again leaving the way open for HMRC to pursue Sandfield’s other employee contractors.
Around 350 contractors were paid in foreign currency loans by Sandfield Consultants. Out of the workforce, 226 have agreed terms with HMRC and paid over £5 million in income tax and NIC.
HMRC estimates up to 15,000 freelancers and contractors were involved in similar schemes through other offshore umbrella companies.
The ruling leaves the way open for HMRC to chase them for any unpaid income tax and national insurance contributions as well.
No evidence
The judge decided the loans were “in substance and reality income from his employment, bearing in mind in particular that Boyle had no need for a loan, there was an entirely artificial exchange rate; the reality is that there was no borrowing by Boyle and he never believed that the loans were other than a means of receiving his income without tax.”
“No evidence has been provided at any stage during HMRC’s lengthy investigation of the scheme, despite many requests for such evidence, to show that the foreign currency ever existed.”
David Gauke, Exchequer Secretary to the Treasury, said: “These schemes were specifically aimed at helping thousands of contractors and freelancers avoid the tax and national insurance they should have paid and the government is delighted with the ruling.”
He added that HMRC has an 80% success rate in arguing cases before the tribunal.
