Resisting temptation

HMRC’s reminder to contractors about loan schemes

resisting temptation

As appealing and alluring as promises of high income retentions and paying less tax may be, many tax avoidance schemes come at a price. That price is not only a financial one, but an emotional one too, because just a few years down the line it is almost certain that HMRC will investigate those involved in such schemes and the Revenue will have their pound of flesh and more.

When a scheme fails following a successful challenge by the Revenue, contractors can expect to be left holding the baby as many scheme providers simply up sticks and disappear. This leaves the freelancer vulnerable and having to pay professional fees for advice but ultimately they are likely to have to stump up the back tax, plus interest and potentially penalties as well. With this in mind HMRC have issued their periodical guidance to contractors about the perils of getting involved with such schemes.

Loan schemes involve an individual receiving income in the form of, well of course, loans. However, if it looks too good to be true then it probably is and HMRC have come up with ten good reasons to steer clear of these arrangements.

1. The loans are taxable

A promoter of a contractor loan scheme may tell you that loans aren’t taxable but the judge in the tax tribunal case of Boyle v HMRC (2013) found that HMRC are entitled to tax loans where contractors receive them as payment for their work. The Revenue don’t like these schemes and they will challenge them.

2. HMRC never approves schemes

Some scheme promoters point to the fact that their contractor loan scheme has a Disclosure of Tax Avoidance Scheme (DOTAS) reference number and therefore HMRC has approved it. This is wrong as HMRC never approve such schemes. The DOTAS reference number identifies you as a user of a scheme and as night follows day, HMRC will investigate you.

3. Undisclosed schemes are challenged too

Promoters may tell contractors that their scheme is 100% compliant because it doesn’t need to be disclosed under DOTAS. This doesn’t mean it is watertight and HMRC will challenge these schemes.

4. Impressive litigation success rate

HMRC has a very high success rate in defeating these schemes in the courts and wins around 80% of avoidance cases that a taxpayer elects to take to court. Unless you are confident of triumphing via the legal system, then settling your affairs with HMRC may be prudent. It will avoid the cost, stress and sleepless nights that court action can bring.

5. Accelerated Payment Notice (APN)

HMRC now issues APNs to users of tax avoidance schemes. Those who receive one will have to pay the disputed tax upfront while HMRC probes the contractor loan scheme they are involved with.

6. Inheritance Tax (IHT)

Loans paid via a trust may mean that a contractor could face an IHT charge further down the line.

7. Risking working relationships

During their investigations HMRC may need to contact clients of the contractor to check their tax position relating to their contract with the freelancer. This could potentially damage the working relationship between the two parties.

8. Contacting mortgage provider and other creditors

HMRC will ask to see information provided to the contractor’s mortgage provider and other creditors about loans from these schemes. If the level of income disclosed on the tax return is lower than that shown on the mortgage application, then HMRC may consider charging penalties.

9. Risk is all the contractor’s

It’s unlikely that a promoter will give any user of its scheme a guarantee that it will work. Furthermore, they may scarper when HMRC starts investigating a contractor’s affairs leaving the freelancer isolated and vulnerable.

10. Don’t be tempted by new types of schemes

At Autumn Statement 2015, the government warned that it would consider legislating in a future Finance Bill to close down any further new schemes intended to avoid tax on earned income; where necessary, with retrospective effect from 25th November 2015.

Submit to Google PlusSubmit to TwitterSubmit to LinkedIn
Comments

Comments  

 
#13 count jack 2016-02-23 09:04
its all a bit political here and i agree that hmrc should clamp down and stop these things happening but there are 2 big buts:

Legislation should never be backdated- its the governments responsibility to make sure there are no loopholes, if there are, close them down. That closedown is the result of a government failure, the tax lost is the price of the failure just like us people have to pay for our own failures.

When all these clever people have finished wiping out these schemes - watch think happens next - ya think they gonna just say, ok, job done, lets go home - or do you agree with me, they gonna tun their sights on the innocent just to justify their jobs.

The future seems bleak to me, nusiance investigations by oligarchs
Quote
 
 
#12 shania 2016-02-16 11:58
Amazing comments.

Always somebody elses' fault isn't it.

Try looking in the mirror first you greedy [censored]wits.
Quote
 
 
#11 Dan 2016-02-11 09:42
Why are you talking about understanding tax codes ?
These schemes were designed to avoid tax by various means (trusts, loans etc.)

How can any intelligent professional think that paying somewhere in the region of 5% to 15% tax (depending on scheme) can be OK when the rest of the country pays 40% at the higher rate.

Common sense check needed !

I agree that the government is not doing enough about tax avoidance by large businesses but that does not alter the fact that many contractors avoided tax for years to fund a better lifestyle.

As for using public services, I'm sure those who used these schemes and paid next to no tax were happy to use publicly funded services ... shameful
Quote
 
 
#10 Donald 2016-02-10 12:22
Quoting Dave:
Should have just paid the tax correctly to begin with, serves you right for getting greedy..


Hmm. So what is "correctly" exactly ? And your assertion that people are being Greedy is interesting. Would you invest money into a standard building society savings scheme, where you would pay tax on gains, or choose an ISA version because it will save you paying tax ? Surely, from your tone, you would choose the one that makes you pay tax rather than choose the one that would see you avoid paying tax?

Did you see the programme on C4 the other day ? 22000+ pages make up the tax code, not as easy at x% of income my friend. Have you ever taken advice about anything in your life ? Do you know exactly how your computer works or do you accept what you have been told hmm? If a doctor gives you advice, do you follow it or take it to a higher authority ? When a tax advisor, or accountant or other professional advises you, do you take that advice as professional or just ignore it ?

Should we do away with professional advisors ? Should we all understand the 'tax code' fully, after all, HMRC don't ? It's interesting that the phrase "Tax Avoidance" has become 'evil' (just like google), and now people talk of 'Tax Efficiency' as a good thing. You should not be so quick to judge others.

It's quite simple. In the good times, HMRC turned a blind eye, complicit even. Now the country has been drained of money, and big business are 100's of steps in front of the government, HMRC have no choice but to pick off the easy targets. Did you know, that even if you win against HMRC, you have to pay the court costs ? It's geared that the small person cannot fight against the machine. If people were categorically told by HMRC after their first Tax return, that it was wrong, I am sure that 99% of them would have stopped there and then, and HMRC had this information, for more than 10 years, and did nothing about it,

My own situation, they got it wrong, very wrong indeed, Their calculation of what I owed was 4 times what I earned (i.e. a 400% tax bill). If I didn't have 10 year old bank statements in my loft to prove this, I would have been sunk good and proper. They issued this 10 years after the alleged discrepancy even though they had the information 10 years ago.

The tax system needs to be scrapped entirely and changed to a 1 page code. Income charged at x%, VAT charged at y%. Across the board, that's how percentages work, end of.

The tax system is used for far too many purposes. It should be used for one thing and one thing only, raise revenue. That way you could get rid of most of HMRC and save all those costs as well.

If the government wants to encourage certain behaviours, they should do this with a completely different tool, a rebate mechanism, which can either mean you pay less for certain things or you apply for "cash back". But Income TAX and VAT should be the simplest form. This would extinguish the micro "Tax Advisor" industry overnight which is basically a bunch of blood sucking teflon coated leeches on the back of hard working people.

Oh hold on a minute, if things were that simple and all these things weren't needed, that would make things transparent and understandable to the masses, no government would even consider that.
Quote
 
 
#9 Cihan 2016-02-10 12:21
The kind of news, I feel like it is aiming to intimidate people and rush towards other options especially limited companies to provide those IR35 and other insurance providers with some clients ..
and not stopping there

If u do have a limited company, you then will hear a lot of anti IR35 news like this scaring people off being caught by HMRC. So a complete chase and trap staging where players and news spreaders different at each scene.
Quote
 
 
#8 Dan 2016-02-10 12:01
Amazing how many individuals here fail to realise that THEY are responsible for their tax affairs.

Pay sod all tax for years while the rest of us are paying our dues, then cry about it when you get caught. 'Whaa I have to sell one of my holiday homes funded from tax avoidance'

What goes around comes around
Quote
 
 
#7 Honest Joe 2016-02-10 11:47
Just as I started contracting I was naive enough to trust my advisor and invested in a scheme - although it was touted as a strategy rather than an avoidance vehicle. Lesson learned as one by one everyone has folded, even my accountant re-started as another company with no liability accepted.

I have always paid tax due and this scheme was based on receiving a refund. So at least I haven't got to find additional cash like some. My worry remains that although I'm squeaky clean, at some point HMRC will want to make a point and give me a load of hassle which I could do without. I have given every advisor and cold caller short shrift ever since and also moved away from the cowboy accountant who I wish if never met.
Quote
 
 
#6 Troy 2016-02-10 11:40 Quote
 
 
#5 Mark 2016-02-10 11:32
HMRC can only send APN's to DOTAS registered schemes. Any non DOTAS scheme does NOT fall under APN legislation (currently).

The 80% of cases they win, are the ones they cherry pick as test cases or low hanging fruit. HMRC don't take everyone to court.

All these schemes are a total scam and the fact that HMRC allow anyone to advertise them is disgusting. The whole issue surrounding retrospective taxation is even more abhorent and the amount of pain and suffering caused is huge.

A real shame the victims of these scams don't get the same treatment as Google when it comes to negotiating their 3% tax rate.
Quote
 
 
#4 Dave 2016-02-10 11:29
Should have just paid the tax correctly to begin with, serves you right for getting greedy..
Quote
 
 
#3 Frank 2016-02-10 11:26
This is such BS. Closing the stable door after the horse is bolted. What they don't tell you is they will retrospectively tax you with interest. This is an attempt to defer attention from the fact that they are guilty of over a decade of inaction and now they are forcing collection via APN. Utter disgrace.
Quote
 
 
#2 Dave 2016-02-10 11:16
but if you are google, amazon, etc it's ok to do this. HMRC are only interested in screwing the poor people because they don't have enough money to afford expensive solicitors
Quote
 
 
#1 John The Fool 2016-02-10 11:16
I was suckered into a scheme promoted as an investment that was very tax efficient. Told it was HMRC approved as had a DOTAS number. Paid an IFA a goodly sum for investment advice so felt sure I was doing the right thing. 10 years down the line, APN appears for £70k+. Retired early due to illness, money tight, so this is a killer blow and you cannot appeal, you have to pay. They have had all my savings and I have had to go back to work although battling a critical illness. BEWARE! IFA scum of course had folded and yet still returned to trading under the same name ... untouchable! HMRC chase YOU, not the real criminals here!
Quote
 

Add comment

Security code
Refresh

Email: info@contractorweekly.com - Address: Sandringham Suite - Windsor House - Humberstone Lane - Thurmaston - Leicester - LE4 9HA