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HMRC loan charge hits home for thousands of contractors

This April, an estimated 50,000 people who used “contractor loan schemes” may be hit by huge tax bills as HMRC gains powers to recover tax from such schemes going back to 1999.

The controversial loan charge was discussed recently on BBC Radio 4’s popular Money Box programme, with an emphasis on the stark choices facing those affected.

What is the loan charge?

The 2019 loan charge targets individuals who used contractor loan schemes to get paid, at some point as far back as April 1999, when such schemes first became common.

Instead of being paid their fees or salary in the normal way, the money was paid to an offshore company and then at least some of it was lent back to the individual.

The premise was that as it was a loan, it was not taxable, even though there was never any intention for the loan to be paid back.

But now, HMRC says that such arrangements are what they called “disguised remuneration schemes” and that the income was taxable.

If anyone affected does not enter into a repayment plan, HMRC will impose a “loan charge”, a new measure which allows them to collect the tax due in one year.

Tough choices

The issue of the loan charge is certainly a sensitive one and the amounts involved are unprecedented. One IT contractor interviewed by BBC Money Box said he faces a calculated liability of £300,000.

Many claim they were assured at the time by their accountant of the legality of such schemes, or that they were offered little choice by recruitment agencies, if they wanted to keep their contract.

Other criticisms have been levelled at HMRC in respect of the loan charge, with many asking why they didn’t take anti-avoidance action at the time and why aren’t they doing more to target the scheme promoters.

The fact remains, despite the best efforts of lobbyist groups such as the LCAG (Loan Charge Action Group), the loan charge is unlikely to be changed or delayed, leaving those involved with some tough choices.

If you have used a contractor loan scheme in the past 20 years, HMRC urges you to get in touch before the loan charge comes into force on 5 th April.

They will agree terms to repay the demand with interest over a number of years and have tried to reassure people that they will not lose their home and will only face bankruptcy as a last resort.

HMRC warns that if you wait until after the 5th April you risk a much stiffer penalty, basically having to pay the entire tax liability back in one lump sum.

Tax lecturer and writer Rebecca Benneyworth told Money Box listeners that the best outcome is to go for a negotiated settlement.

No sympathy from HMRC

According to BBC Money Box presenter Paul Lewis, HMRC are completely clear on their position on contractor loan schemes, having stated that:

“These schemes did not work, the payments were always taxable, that’s been supported by the courts and the loan charge is designed to ensure these individuals pay the tax that was due.”

HMRC also warns against any new arrangements which claim to circumvent the loan charge:

“Any arrangements to avoid the loan charge, which seek to deceive HMRC as to what is really happening, may be fraudulent. At the very least, anyone who takes part in an offensive arrangement is likely to face penalty sums, chargeable along with any tax and interest that may be due.”

Bottom line - HMRC are not messing around. Scheme promoters make all sorts of promises to get contractors to sign up, but if something seems too good to be true, it more than likely is.

For your peace of mind and to avoid future trouble with the tax authorities, always use an FCSA accredited umbrella company, CIS provider or limited company accountant. You can find a list of them here.