The UK Government has been taking big steps to tackle tax avoidance over recent years and is clamping down on disguised remuneration schemes. Contractors and employers who had been in receipt of remuneration disguised as loans are facing tough penalties, with the 2019 Loan Charge targeting thousands who have used these schemes over the past two decades. Many contractors who worked for non-compliant umbrella companies may be affected by the Loan Charge.
What is the Loan Charge?
The 2019 Loan Charge enables HMRC to collect taxes that it thinks have been avoided via disguised remuneration schemes. Tax collection can go back to the start of the 1999/2000 tax year, and HMRC expects payments to be made by the 31st January 2020 AKA the self-assessment tax return deadline. Payments made via certain loans are to be treated as income and therefore taxed just as their normal salaries would be.
Is the Loan Charge fair?
There has been a strong reaction to the news, with many worries about bankruptcies and other forms of financial dismay being expressed. Some MPs have even backed a motion to have the legislation abolished, claiming it is unfair, with the schemes having been legal when the loans were paid. There are arguments that many well-meaning contractors and other individuals may have been manipulated into becoming involved with the schemes.
How will the loans be taxed?
Current income tax rates will be used to tax the loans as income. It’s said that many unscrupulous umbrella companies informed their clients that they could increase their take-home pay by getting involved with loan schemes, telling them that such schemes were entirely legal. As many individuals will have received six-figure sums in the form of loans, their new tax liabilities could be vast.
What can affected contractors do?
Those that have been paid via such loan schemes are being urged to take action at the earliest opportunity. However, it’s wise to seek out legal advice from an experienced professional before you take things any further. The worst step to take would be to simply ignore the loan charge, as it will not just disappear. Those that are using a loan scheme right now are urged to exit it immediately and seek out a compliant accountancy service.
Should I contact HMRC?
Any loans that have not been settled with HMRC are now being regarded as earnings for the financial year. If you have received a loan over the past two decades, you are advised to contact HMRC about it as soon as possible, though there is a deadline of 31st October 2019 for providing details about the loan. If you fail to comply with the loan charge, you are likely to be met with considerable penalties.
Can I make a settlement?
HMRC are offering a ‘settlement opportunity’ for those that have been part of disguised remuneration schemes. This includes income tax, primary and secondary Class 1 NIC’s and inheritance tax plus an interest rate for the late payment. HMRC says it is looking at each case individually and states that it could come to arrangements with those unable to pay the tax in a short time frame.
Schemes of notoriety
The Loan Charge is designed to target a number of loan-related remuneration schemes. Examples of these can include Contractor Loan Schemes or Arrangements, Employee Benefit Trusts (EBT) and Employer Financed Retirement Benefit Schemes (EFRBS). They went by many different names in the past, becoming increasingly common as more and more contractors were targeted. Things can become very complicated when interest on the loan has been rising and when the original agreement is still binding even though the loan has been paid off. Over the past decade, HMRC has launched more than 100 different processes designed to reduce tax avoidance and evasion. It states more than £175 billion in tax has been recouped as part of these measures so far. The Finance Bill 2017/18 outlined plans to recover £1.2 billion in avoided or evaded tax.
How can agencies assist their candidates?
Agencies with candidates who may have been part of loan schemes in the past are being instructed to encourage their candidates to contact HMRC as soon as possible. The earlier a candidate expresses an intention to make a settlement, the more flexible HMRC are likely to be. It is extremely unwise for candidates to simply ignore the Loan Charge and hope that it will go away. HMRC has become even more adept at taking action against tax avoiders over recent years. If a candidate has not yet been contacted by HMRC about the Loan Charge but there is a chance they will be, they can expect this to happen sooner rather than later.
Is ignorance an excuse?
Even when a candidate genuinely entered into a scheme in good faith, there is no chance HMRC will accept ignorance as an excuse. The tax will still need to be paid. However, a candidate could file a professional negligence claim if their former agency forced them to enter into a loan scheme. The Criminal Finances Act 2017 made it an offence for agencies to direct candidates to non-compliant payroll schemes.
Choose One Click Group – a wholly compliant umbrella company
At One Click Group, we can come to your assistance if you require the services of a wholly compliant umbrella company. We have two decades of experience to draw upon and are able to offer a wealth of solutions for contractors and freelancers. The services that we offer ensure all your needs are met, and that you constantly remain on the right side of HMRC legislation. We work closely with some of the UK’s most reputable recruitment agencies as well as the Institute of Recruiters (IOR), PRISM, and All Umbrella Companies Are Equal. We are audited independently by Eversheds via the Safe Umbrella audit process.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.