HMRC have alerted professional contractors or freelance workers to the risks involved in using tax avoidance schemes involving loans.
How contractor loans work
In a contractor loans scheme you’re paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust.
You don’t get your payment (or ‘loan’) directly from the company you are providing work for because it’s diverted through a chain of companies, trusts or partnerships.
The companies that promote these schemes will tell you this will save you tax.
If you’re any type of professional who normally gets work as an agency or temporary worker you could be offered a contractor loans scheme.
Why these schemes could cost you more
- Scheme promoters will tell you that the payment is non-taxable because it’s a loan, and doesn’t count as income.
- In reality, you don’t pay the loan back, so it’s no different to normal income and is taxable.
- So if you’re using one of these schemes and being paid this way you’re highly likely to be avoiding tax. You could end up paying additional taxes, penalties and interest as well as a fee to the promoter.
How to spot schemes that are too good to be true
There are common signs that a scheme is a method of tax avoidance that could end up costing you more than you saved up front.
You’re told you can take home 80% to 90% of your income.
- This is highly unlikely to be true. You should get independent advice before signing up to the scheme. Do not rely on the promoter who is selling you the scheme.
You’re told you don’t have to declare the scheme
- Contractor loan schemes must be declared to HMRC
- When they are declared they are then given a scheme reference number. The promoter must pass the reference number to anyone using the scheme.
- If you’re using a contractor loans scheme and you don’t show the correct scheme reference number on your tax return, you will be charged additional penalties.
- HMRC challenges undisclosed schemes too. So even if a scheme hasn’t been declared you may still need to pay additional tax, penalties and interest if you’ve used it.
You’re told the scheme is HMRC approved
- HMRC never approves any schemes, so this is always wrong.
- You might be told that because a scheme has a scheme reference number, HMRC has approved it.
- The reality is that the reference number identifies you as the user of a scheme, and you can expect HMRC to investigate it.
What could happen if you use one of these schemes
- HMRC challenges contractor loans schemes. Where scheme users push their case to litigation, HMRC wins around 80% of all avoidance cases that end up in court.
- The scheme promoter may not be around to support you once HMRC starts investigating your tax affairs. You could have to deal with complex investigations on your own.
You may have to pay the disputed tax up front
- If HMRC sends you an accelerated payment notice you will have to pay the disputed tax up front while HMRC investigates the contractor loans scheme you’re in.
You might also have to pay Inheritance Tax
- If your loan was paid through a trust, you may have to pay Inheritance Tax now or in the future.
Your mortgage provider and other creditors may be contacted by HMRC
- HMRC will ask to see information you provided to your mortgage provider and other creditors. If the income on your tax return is lower than the income on your mortgage application, HMRC may charge you penalties and interest as well as the additional tax you should have paid.
What to do if you think you’re in a contractor loans scheme
- HMRC strongly advises you to withdraw from the scheme and settle your tax affairs. You’ll avoid the costs of investigation and litigation, and minimise interest and penalty charges on the tax you should have paid.
- Ask your accountant to review the scheme, they have your best interests in mind; the promoters of these schemes are in it to make money for themselves.
- Secondly, beware of new companies offering these schemes. If you search online you can find a litany of contractors that have been persuaded to try the schemes only to find the promoters disappear when HMRC open an investigation.