For nearly two decades, if you were a contractor, it is
likely that you participated in or were asked to participate in a contractor
loan scheme on the understanding that they were tax compliant. These are
arrangements between a contractor and a client that, on the face of it, are
simple arrangements which result in the contractor receiving payment for
services provided.
The government determined in 2016 that HMRC were legally
entitled to consider them as “disguised renumeration” meaning that they any
payments made under them was subject to income tax and National Insurance in
the usual way. HMRC have stated down the years that tackling what they consider
as tax avoidance arrangements was a priority.
What made this situation different was that the
legislation allowed HMRC to charge income tax and NI on these earnings going
way back to 1999 – the so-called “loan charge”.
Legal and accounting professionals as well as many
members of parliament abandoned their usual restraint and released statements
such as:
- “[loan charges] contravene generally accepted notions of fairness and break the constitutional convention against retrospective legislation, imposing tax charges in cases where taxpayers already had legal certainty that none were due.” ICAEW
- “It is not acceptable for HMRC to create a retrospective tax liability where none currently exists, especially as HMRC has been aware of loans to employees”. ICAEW
- “[Loan charges] were, and still are, legal and in most cases the motivation behind their use was not to reduce tax but simply to comply with the poorly drafted IR35 legislation, which 18 years on, remains unclear.” Jim Fitzpatrick MP
Such statements are but the tip of the iceberg and although
there are reviews and legal challenges pending, it is still the case that the
loan charge will come into effect on the 5th of April.
In brief, if you have participated in one of
these schemes…
You are liable to
pay tax and national insurance on all loan payments outstanding since 6th
April 1999 ONLY if HMRC can not collect the amount from the original “employer”
(for example if it no longer exists)
These are your options…
- Repay the loan(s)
- Pay the tax and NI due on the loan(s)
- Pay the loan charge on outstanding balance
Alternatively, you can discuss your circumstances and
seek professional advice. Calculations are heavily dependent on your personal
circumstances, how the loan scheme was structured, and the tax rates in effect
when each loan was made.
It should be noted that HMRC are heavily promoting the
message that they will act “sensitively“ and be “understanding” IF
you contact them at your earliest
opportunity. HMRC will calculate the amount due in accordance with legislation,
however, there may be mitigating circumstances relating to your case.
The clock is ticking and time is short if you are
affected by this legislation. Forths Tax are experts in this area and in many
cases can reduce your liabilities than if you contacted HMRC directly.
LOAN CHARGE LATEST NEWS
Effect on contractors
The BBC published an article
on the 26th of February on the impact the Loan Charge was having on
over 1,000 freelance workers. QC Jo Maugham said that there was not sufficient
warning issued by HMRC to those affected and that tax advice firms needed to be
subjected to regulatory oversight.
Jo Maugham said “anyone - including criminals - can offer
tax advice, can sell tax products or mis-sell tax products and they do so,
knowing that they'll walk away with all the commissions that they earn without
having any real responsibilities. We regulate dental hygienists. Why don't we
regulate tax advisors?"
HMRC “misled” Treasury
Keith Gordon QC, Leading tax barrister of Temple Tax
Chambers, wrote a letter
to the Financial Secretary to the
Treasury, informing him that the Loan Charge law was not compatible with
established legal principles and detailed how HMRC had failed in its role in
the proceeding that led to its creation.
He remarked that HMRC was vague in its objections to the
principles involved in contractor loans until the legislation was actually
passed. And that, if it had made its opposition clear from the outset, that
this would have been seen as a red flag to those already in these schemes or to
those intending to join them. If this had been the case then those affected
would have been in a position to take remedial action much sooner, according to
the QC.
Loan Charge facts and figures from HMRC
Using data obtained from the HMRC, FT Advisor
states that HMRC expects
individuals across the UK will be faced with a combined bill of £800m due to
the Loan Charge, with a figure of £13,000 being the median settlement amount. A
total amount of £2.4bn is expected to be raised from employers.
Loan Charge advice
Our advice would be to examine all options open to you
before contacting HMRC and agreeing to a settlement amount.
We would recommend speaking to our experienced team for
advice that could turn out to be invaluable. In many cases, taxpayers achieve a
much more favourable outcome through us rather than by representing themselves
directly.
Please call 0113 387 5670 or email enquiries@forthsonline.co.uk
to find out more.
Loan Schemes Background
What are the contractor loan schemes affected by the
“loan charge?” These schemes rely on the fact that individuals do not pay tax
on loans they receive from their clients and that companies pay no tax if they
loan money to a contractor. These two
essential elements combine in to defining what a loan scheme is - an
arrangement by which a company pays money to contractors via a never to be
repaid loan rather than paying money via a salary or as a payment for services,
both of which are taxable.
The loan schemes were administered by companies who
marketed themselves as experts in tax reduction. Acting as a 3rd
party they received fees from both the contractors and their clients. These
fees were sometimes considerable but they were always below what both parties
would have paid in employment taxes if the payment had been made in a more
“conventional” way. Some of these specialist companies claimed they were
approved by the HMRC, adding legitimacy to their claim that such schemes were a
perfectly acceptable practice.
Since 1999, HMRC has been repeatedly asked to rule on how
it viewed such arrangements, and its answers could usually be characterised as
“no comment” and they certainly took no action to challenge them - until now
that is. Backed up by the new legislation underpinning the “Loan Charge”, they
now consider all payments from a loan scheme as income from employment and they
are demanding the National Insurance and income tax that would have been paid
as if this had always been the case.
In some cases, contractors and contracting companies
joined these schemes specifically for the purpose of avoiding tax. In many
other instances, contractors assert that they were forced to participate in
these schemes or that they would be ineligible to work for the company
involved.
So widespread was this practice that even such prestigious
organisations as the BBC and many local councils moved considerable parts of
their workforce from traditional paid employment onto such schemes. The
employees were told that they had to cooperate otherwise they could not longer
continue to work in their previous capacity.
Unfortunately, HMRC makes no distinction between them and those who set
out to avoid tax. Whether someone was an active participant or a forced one,
HMRC will pursue them with the same vigour.
Even though there are various legal challenges and
judicial reviews in process, or planned, that could change the status quo, it
must be noted that it is due to come into effect by April 5th. If
you have not took action yet, we would strongly urge you to do so. The sooner
you act the more you can potentially save.
Call us on 0113 387 5670, email us at enquiries@forthsonline.co.uk
or fill out an Enquiry Form
and we will contact you directly.
