Tax, contractors and the loan charge – what you need to know and do.
Contractors who have been using schemes or arrangements, often known as contractor loan schemes, to minimise the tax they pay need to take action to avoid the new ‘loan charge’.
These schemes make payments in the form of a loan or credit from a trust or company. You don’t get your pay directly from the company you work to. Instead it’s usually diverted through a complex chain of companies, trusts or partnerships.
Those promoting and operating these arrangements claim this will save you tax. They will tell you the payment doesn’t count as income because it’s a loan or credit and is not taxable.
In reality, the loan is never paid back, so it’s no different to normal income and is taxable.
Anyone using arrangements which pay you in loans is avoiding tax, even if you have been told by the promoter or your employer that this was not the case.
HM Revenue and Customs (HMRC) has always said these payments are taxable. One of the ways the government is tackling these schemes is the new ‘loan charge’ which means people who have used such schemes will have to pay tax on the total amount of all loans taken since 6 April 1999 that are still outstanding at 5 April 2019.
If you have used an arrangement like this and you have an outstanding loan you can take action now to prevent being caught by the loan charge. You need to either settle your tax affairs, or repay your loans in full before 5 April 2019. Acting now means you are likely to pay less than if you wait for the loan charge to bite.
This is because the loan charge works by adding together all of these outstanding loans and other similar credits and taxing them as income in one year. The result is you are likely to pay tax at higher rates than you would have at the time you were paid in loans.
If you settle your tax affairs before the loan charge arises you will pay tax at the rates for the years you received your loans. Settling does not mean all the tax has to be paid in full before 5 April 2019 and anyone concerned can read the full details on how to settle online.
If you are worried about being able to pay the full amount in one go please contact HMRC.
If you settle before the loan charge you will be able to pay the settlement amount over a period of up to 5 years without having to provide detailed supporting information provided that:
- your expected current year taxable income is less than £50,000 (for employees, this is your expected gross earnings, for self-employed people, this is your expected net profit)
- you’re no longer engaged in tax avoidance
If you need longer, or earn more than £50,000 we may still be able to agree a payment plan with you. We want to help everyone pay what they owe and help you put things right. We consider all personal circumstances to agree a manageable and sustainable payment plan wherever possible.
If you have used one of these schemes, or are unsure and want some further advice, then get in touch with HMRC as soon as possible. We can explain how you are affected and help you work out how much you owe. We have dedicated teams who can help you in a clear and straightforward way. Further details can be found on GOV.UK.
Arrangements that claim to avoid the loan charge
HMRC is aware that some firms and individuals are promoting arrangements that claim to enable people to escape the loan charge. These arrangements do not work and people are strongly advised not to sign up to them. Please tell us if you have been approached so we can stop them being sold to others. Avoidance does not pay.
While those promoting these arrangements claim these work, people should be clear we do not agree. Any arrangements to avoid the loan charge, which seek to deceive HMRC as to what is really happening, may be fraudulent.
We are pursuing hard those who are promoting tax avoidance arrangements and those that help them and we have a number of sanctions and penalties we can apply to both promoters and enablers of tax avoidance arrangements.
Absolutely ridiculous! HMRC knew full well what was happening and did nothing for years and now to be applied retrospectively (YES…no matter how you dress it up and say its not….IT IS still retrospective taxation!)
Law can change and people needs to respect that…something against the law should not be done….but the Loan Charge target previous years and this is unfair and utterly wrong….and shame on you HMRC….shame on you Conservative Government!
I partly disagree. Although it’s harsh taxing retrospectively like this, it’s only going to upset ONLY those individuals who used this as a vehicle to avoid tax.
Before you make any judgement I suggest you educate yourself first. Have a read of this first.
The advice given was this was legitimate from reputable accountancy firms and it was not illegal. I was only ever a contractor for one period in my life having worked every day since I was 16 and served my country for 9 years. I have never tried to illegally do anything to avoid paying tax but when you pay for advice and this is what you receive what on earth are you supposed to do? You may have more knowledge of financial and tax affairs than the average Joe but I did what I thought was the right thing to do…. pay a professional!! Don’t judge everyone .
Am I mistaken? Tax avoidance is Ok isn’t it? tax evasion is illegal. (Or is it the other way round?)
Has HMRC really stated
“…We are pursuing hard those who are promoting tax avoidance arrangements …”
If arrangements are put in place that prevent tax being collected in the manner anticipated by legislation then……refine the legislation.
Agree with ‘Concerned Citizen’ – you can’t go around collecting taxes retrospectively when no ‘evasion’ has taken place. If HMRC are only now explicitly making these loan arrangements taxable then….it can only apply going forward.
Everyone should pay the right amount of tax – the right amount can only be determined if income is paid to citizens making use of all allowances and legal vehicles and facilities to minimize the tax required on that income. Otherwise, too much tax has been paid which is equally incorrect as too little.
When you say “HMRC has always said these payments are taxable”, why have you waited 20 years to collect and why didn’t you shut down the promotors when these tax avoidance (not tax evasion) schemes were disclosed to you over the last 20 years? This would have been the kind and sensible thing to do wouldn’t it? Rather than let people think everything was ok for 20 years and then making a post on your website months before it is all due?
Between this and Brexit the Tory government (which I have always supported till now) are going to kill any foreign investment into this country. I mean would you invest in a country that belatedly created laws to collect taxes in one foul swoop that they couldn’t be bothered to collect over the last 20 years?
This should be dealt with exactly the same way as IR35 is.
The SA form should now have a question as follows :
1. Have you been a recipient of a loan from a Ltd
company (in your capacity as director, or other) ??
2. If yes, please supply the following information (for
each applicable company) :
a) Company name
b) Amount taken as loan
c) Date loan taken
d) Repayment interest rate
e) Total amount repaid
A simple way for basic data analytics to compile a list
of those the IR jobsworth Nazis should be taking a closer
look at, and those who should be left be.
Retrospective taxation : tough.
Consider the revenues lost to the state.
They had long enough to discern and deal with it.
After all they have spent 18 years on the low revenue
yielding “class warfare” that is IR35.
The government had to implement new legislation in 2011 before these schemes were considered taxable, despite having been around for years with HMRC failing to raise issues and purely monitoring them as DOTAS schemes.
The Loan Charge is retrospective legislation reaching back 20+ years in an attempt at a tax grab to overcome decades of failures in Government and HMRC. It will devastate families and careers across IT / Health / Entertainment and severely damage entrepeneurs in those industries who followed the law as it was set down at the time.
Whilst this may provide a short-term tax boost (albeit considerably reduced by the considerable inefficiencies and costs of the HMRC) , it will inevitably back-fire as HMRC / Government corrupt the law and cause reduced tax revenues going forward. Who wants to up their productivity knowing they can be s***wed over 20 years later for following the law.
Is it just me, or the whole situation walks and quacks like some huge state endorsed scam of its own citizens? See for yourselves:
1. HMRC does nothing for ~20 years
2. During this period, the whole lucrative “scheme” industry gets created, grows, matures, gains reputation. Thousands of family bread-winners lured.
3. HMRC uses its legislative powers to retrospectively demand tax from scheme users, with interest. Possible damaging effects on scheme users (bankruptcies, suicides, family breakages) simply brushed aside.
4. The sanctions against scheme organizers are introduced, but they are not retrospective. “Old” scheme organizers keep enjoying spoils.
5. I am yet to hear of any investigation as to why it took HMRC 20 years to get its act together. So nobody to blame on that side either.
It is the scheme users now to pick up all the bills, with apparently nobody else to blame. Does it not raise any questions?
past tense: repaid; past participle: repaid
pay back (a loan).
“the loans were to be repaid over a 20-year period”
synonyms: reimburse, refund, pay back, recompense, compensate, remunerate, square accounts with, settle up with, indemnify, pay off; More
pay back money borrowed from (someone).
“most of his fortune had been spent repaying creditors”
do or give something as recompense for (a favour or kindness received).
“the manager has given me another chance and I’m desperate to repay that faith”
synonyms: reciprocate, return, requite, recompense, reward; More
be worth devoting time to (a specified action).
“these sites would repay more detailed investigation”
synonyms: be well worth; More
People are avoiding tax today (and have done so for many years) by paying some of their income into a pension. That income is not taxable. Its legal, acceptable tax avoidance. What if the government decided next year to retrospectively change the law to make this illegal and demand back taxes? Anybody remember MIRAS schemes where mortgage interest was exempt from tax? Maybe HMRC will come after that next. Got a pension? Had a Mortgage once? Be afraid, be very afraid!
The reason HMRC haven’t chased these till now is that they don’t have any law which actually makes them illegal or owing tax!
All the case law on EBTs (Sempra,Dextra etc) said that loans were not taxable and the Rangers ‘win’ said that the tax is owed by the employer, not the employee.
There is NO law (and there still won’t be even after the loan charge) that makes any tax due on any of these loans by an employee other than this bogus Loan charge. Other than this charge brought in by deceit to Brexit distracted MPs, HMRC have no justification for charging tax on any of these.
Its even worse if you were self employed/limited company (and not employed) as there was no law before 2017/2018 that even had any bearing on the EBT equivalent there. (Although you have to look at IR35 for a total mess of employed/self employed there and who is to blame for that one?…)
So for all the people happy to say immoral they deserve it etc, how can you say this charge is valid when there is no LAW before or after it that makes any tax due on these loans? Its not bending the law – THERE IS NO LAW! How can people be penalised for sticking to the law?… Its nothing more than the politics of envy.
MPs really have to take a long hard look at HMRCs fitness for purpose with this as they have gone too far.
Oh for goodness sake, you were in a scheme that was clearly dodgy (and please don’t give us all that rhetoric about how you were all duped by some clever salesman) and now you have to pay up. Retrospective ? Tough ! You got away with it but not anymore.
I’m sure you were all happy to use publicly funded services (schools, hospitals), all the while chuckling to yourselves about how little tax you were paying.
I for one applaud the government for taking action. Next step the big multi-nationals !
Very happy to use publicly funded services because I was still funding them – income tax isn’t the only tax.
Change the law; simplify tax and people wouldn’t be encouraged to use such schemes which, by the way are the tip of the iceberg of tax avoidance.
Government needs to end the ability to avoid. Why should anyone pay more? I agree, but we’re part of a stupid system, a system that pays people to loaf around doing nothing whilst getting paid by the state. A system that enables people to buy cars and fuel them at a beneficial tax rate. A system that allows people to save 100s of thousands by shifting ownership to a spouse upon death. A system that allows people to buy a house and avoid stamp duty. Why should I pay full price and my neighbour get the same product many times cheaper?
It isn’t fair, but you can’t worry about what the others are saving (avoiding) – you have to use the system to save (avoid) paying too much yourself.
Dan, you do not seem to understand the potential implications of HMRC’s actions on this; HMRC as judge and jury are able to set the rules for taxation as they see fit (I don’t agree with the extent of their powers but that’s a different conversation).
If HMRC change the rules then so be it, we have to adopt these new rules. What they cannot be allowed to do is change the rules and then apply the new rules retrospectively and demand those impacted by new rules must pay tax that they would have paid had the new rules been in place 20 years ago.
HMRC’s decision not to introduce taxation rules at an appropriate time in history does not give them authority to introduce new taxation rules and arbitrarily choose a date in history for when these rules will apply.
If this approach is supported, where does it end…HRMC will undoubtedly see this as a green light to introduce further changes to taxation rules as they see fit, select a date in history from which they want to apply the rules, write to everyone now caught up in these new rules and demand tax that was never due.
For clarity, I was not involved in any of these schemes so am being entirely objective in my comments here.
I totally agree, I called HMRC and told them about the company I was going to be working through, to which HMRC replied that this was fine. Now I am told I will potentially be looking at a life changing charge, if HMRC decided that base rate tax should be 25% and date it back 20 years I am sure there would be an outcry, so how is this loan charge any different, it should be made clear that the law is changing but from 2019 end of….
Please don’t judge anyone by your sstandards. I personally sought advice from a very reputable accountancy firm, given that I’m not an accountant this was the right thing to do. There was no law around this and so not illegal. I sought advice on how to set up as a limited company and I paid for advice. What else would you reasonably expect me to do, get a degree in uk taxation law? Even if it had it still wasn’t illegal. Meanwhile there have been suicides, torn up families , bankruptcies , mental health issues caused by extreme stress. Yet you sit there gloating. Well done I’m glad you can sleep at night!! No issues with them making a law moving forward but retrospective taxation is Grossly very unfair. Don’t go smirking too much it could happen to you for anything at any point
The truth is its all horseshit.
Simply do not register like I have not and just laugh in its face! I don’t have the money to pay it back so if they came to me, i’d just simply tell them to fuck right off. I don’t have the cash, don’t own any property. Couldn’t care less!
I have just received a letter today 26th November from the HMRC that they believe i was involved with one of these schemes, i was unaware of this and that i should have registered by 30th of November difficult when you don’t know, i am at a loss where to go next.
There are methods under PAYE for low earners that better any Loan Scheme or Share Dividend. Proving there is only Tax Avoidance for very high earners that have exhausted their tax allowances.
Blanket claims of Tax Avoidance are denying rights to the various tax allowances available. The methods of assessment used by HMRC are likely to also be denying those rights.
hey very nice article thanks for sharing with us as a bank employee i have seen most of the people are facing the may problems to get a loan this info will really helps them a lot to get loan faster and easier and the way you are explaining is good and very clear keeps going
I think you are reading the wrong article
Unfortunately HMRC are only tightening up existing tax law.. when I first started contracting I looked into the whole beneficial loan/trust idea and it was quite clear that a loan was always repayable. If a loan was made and not repaid then the company making that loan were legally responsible for its collection. If they didn’t then it would be treated as untaxed income. The only way round that would have been to keep the money outside UK. It’s called due diligence. Check the facts. People caught either didn’t check or didn’t want to check. A fingers crossed approach to taxation which it seems hasn’t worked out.
The promoters of theee schemes are not in the UK and therefore outwith HMRC powers.
Individuals involved knew when they received their salary they were getting money for services|work carries out without paying tax. They had the opportunity at any time rectify this. What all about all the individuals who pay their
Full tax and NI through their salary!!
Sorry no sympathy
I worked as a contractor for 36 years, ending in 2012, always as a ltd company and always playing by the rules with HMRC, with whom I had a good working relationship. In the 2000s fellow contractors were bragging about their loan deals, which gave them up to 90% of their income untaxed, but I was highly sceptical of the long-term financial probity of such obviously conconted schemes. Regarded as foolish and out of touch, I was derided for not having the ‘nous’ to sign up for this new Eldorado. It looks like the hens have now come home to roost and I’m so glad I didn’t have the necessary ‘nous’ to get involved.
BTW – I notice that the loan vultures are starting to circle.