Offshore companies have been used in the past by contractors to reduce tax liabilities. Offshore companies are businesses that are registered and conduct their ‘central management and control’ outside of the UK. The historic benefit of this kind of company structure was that profits are not subject to tax.
But an offshore company cannot protect anyone from IR35, because it simply does not matter where the company is incorporated – offshore companies have to register with HMRC like anyone else and any tax avoidance scam will be carefully scrutinised. Because the government has plugged the gap that previously allowed intermediaries to be used (UK or offshore) IR35 status is determined by the contractors working relationship with the agency and the client and the contracts involved.
Holding money in offshore funds has long been viewed as a route to escaping taxation, with payments coming in the form of distributions, loans and dividends. But recent legislative changes now mean that all income generated in the UK by a UK resident is liable to taxation – whether the income is received or not. Such income now has to be declared on a tax form and so using an offshore fund makes no difference to either tax or IR35 position.
Anyone considering using an offshore company should take very careful, unbiased legal advice from several sources. Some offshore schemes are actually illegal and the threat of fines, prosecutions and back taxes should be enough to put anyone off.