With the recent revelations of the Paradise Papers and the offshoring of income, the question is: How prevalent is this in the Contracting & Freelancing Industry in Ireland?
Is it only the world’s elite that are using these offshore structures to avoid tax or could it be closer to home?
The use of EBT’s (Employee Benefit Trusts) as offshore tax solutions have been prevalent for many years in the UK.
Typically, a Contractor using one of these structures would be “employed” by a provider based in Isle of Man or Channel Islands and receive employee loans in lieu of salaries, typically earning between 85% – 90% of their income “free of tax”.
In 2010, HMRC introduced legislation removing the tax benefits of these schemes, however they didn’t go away. They are still alive and soon cropped up in Ireland after UK legislation was implemented.
Six years ago, Icon Accounting was approached by a scheme provider to sell an offshore tax scheme to Contractors with mega fees available. This didn’t sit right with us and we investigated more thoroughly.
The scheme set up a base in Ireland and proceeded to heavily market it with slick sales pitches, promises of 85% – 90% retention rates and large referral fees to promoters who refer the contractors. The scheme got little traction and we did lose some clients as we could not compete with the promise of no tax. However, the appetite of most Contractors was to steer clear and rightly so.
So how does the scheme work?
They use a foreign based company and register it for Irish payroll taxes and VAT as a branch of the foreign company. This gets around local compliance checks with agencies and recruiters and enables them to get through most compliance checks.
The Contractor is paid a salary of approximately 15k per annum and in general that results in no tax with a small amount of PRSI & USC being paid.
An ‘Employee Benefit Trust’ is set up in an offshore jurisdiction. In this case it was Gibraltar and the balance of the contract funds are remitted to this trust.
The balance of the contract income is paid via a loan to the Contractor that will give them a minimum of 85% retention up to 90%.
Typically, a Contractor earning 100k per annum could “retain” 85k-90k.
As with all these schemes, Revenue found out and tightened up legislation. In the Finance Act 2013, Revenue inserted a Section 811b into TCA 1997 to combat these schemes. The measure imposes an Income Tax charge on the benefit received by employees or former employees. S811B of the Act gives Revenue the right to impose a tax charge directly on current, former & future employees of the company. This took effect from 13th February 2013 so anybody in a scheme of this ilk since then should be worried.
We are aware of several of these schemes operating in Ireland under different structures that allow for offshoring of contract income.
If you are a Contractor and in a scheme, that seems too good to be true, then it normally is.
What to watch out for?
- Promise of retention rates of 85%-90%
- Payments of low salary coupled with loan, bonds or trust payments from an offshore scheme
- Contract with various countries, Mauritius, Gibraltar, Cayman Islands and even Cyprus
- Multiple contracts in the chain
- Slick sales pitch promising compliance
- Assurance of a barrister’s opinion – Ask to see it and ensure it’s from an Irish barrister
- Assurance to promote that you are an employee and have no personal liability however S811b counteracts this
If you are in a scheme, then we advise you to get independent tax advice to ensure you are operating legitimately.
Do not take the view that whilst it’s unethical it is legal as you may fall under Section 811b and have a large tax bill further down the line, when the scheme is shut down and ultimately disappears.
What should a recruiter do to mitigate and prevent the use of engaging a Contractor who uses one of these schemes?
- Request Company Registration documents – Ensure the company is registered in the Rep. of Ireland
- Irish VAT Registration Certificate
- Clause in contract stating Income earned from the Contract should be taxed in Rep. of Ireland and no offshore schemes in operation
- Request a copy of the Irish Tax Clearance Certificate.
- Ask ‘does the company or provider have a physical office in the Rep. of Ireland?’
- Only use reputable umbrella company providers or Irish personal limited companies with full tax registrations
- If they offer large referral fees this will raise a flag
Generally, they will have an Irish tax registration that will give a facade of compliance to recruitment agencies and clients. The reputation damage of being associated with these schemes for agencies and clients is immeasurable, which can be seen from recent media coverage.
Perhaps, with the Paradise Papers in the news, Irish Revenue may now be prompted to take a closer look at these offshore schemes operating within the Rep. of Ireland and other income that is not been taxed in this jurisdiction and give the compliant Irish based Contractors a break on the genuine Travel & Subsistence expenses they incur in the performance of their duties.
Gerard Kiernan FCCA