Spotlight on Contractor Loan Schemes

HMRC add contractor loan tax avoidance schemes to their ‘Spotlights’

Following on from HMRC’s recent victory at the First Tier Tax Tribunal in the Philip Boyle case, the Revenue have added contractor loan avoidance schemes to their ‘Spotlights’.

‘Spotlights’ warns taxpayers about certain tax avoidance schemes which HMRC believes people should be aware of.

Mr Boyle, an IT contractor, participated in an offshore scheme, marketed by Consulting Overseas, that involved foreign exchange loans. He failed to persuade the Tribunal that the scheme worked and that the money he received was not taxable. The Tribunal also dismissed a further argument that if Mr Boyle had received income from his employment then it should have been taxed under PAYE by Sandfield Consultants Ltd, the Isle of Man employer.

The Tribunal judge concluded that the monies paid to Mr Boyle as loans was ‘in substance and reality income from his employment’ and therefore taxable. Even if the monies received under the scheme was not income from employment, Mr Boyle would still have been responsible for paying the tax by virtue of specific rules appertaining to tax avoidance, known as the ‘Transfer of Assets Abroad’ rules.

Whilst scheme promoters sold contractor loan schemes containing a variety of different features they all had a common theme in that they involved individuals signing an employment contract with an offshore company and receiving a large slice of their income in the form of a ‘loan’ from their employer, either directly or indirectly through an intermediary. HMRC announced back in September of last year that they were challenging these schemes and since then many scheme participants have received tax assessments or enquiry letters.

According to the Revenue, many contractors who took part in these schemes have already agreed to pay tax and interest on the money they received.

As a reminder to those freelancers that may be tempted by the lure of a tax avoidance scheme they should be wary of tax planning that involves any of the following features:

• It sounds too good to be true.
• Artificial or contrived arrangements are involved.
• It seems very complex given what you want to do.
• There are guaranteed returns with apparently no risk.
• There are secrecy or confidentiality agreements.
• Upfront fees are payable or the arrangement is on a no win/no fee basis.
• The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
• The scheme is said to be approved by HMRC (it does not follow that this is true).
• Taxation of income is delayed or tax deductions accelerated.
• Tax benefits are disproportionate to the commercial activity.
• Offshore companies or trusts are involved for no sound commercial reason.
• The involvement of professional trustees is claimed to guarantee that the arrangements succeed.
• A tax haven or banking secrecy country is involved without any sound commercial reason.
• Tax exempt entities, such as pension funds, are involved inappropriately.
• It contains exit arrangements designed to sidestep tax consequences.
• It involves money going in a circle back to where it started.
• Low risk loans to be paid off by future earnings are involved.
• The scheme promoter lends the funding needed.
• There is a requirement to take out insurance against the failure of the tax planning to deliver the tax benefits.

Remember – HMRC never approves any scheme so do not be fooled by a promoter that tells you otherwise.