HMRC Focus on Contractor Loan Schemes
Newsletter issue - August 2016.
HMRC have recently published new guidance on 'contractor loan schemes', which have been widely marketed by scheme promoters as a method of receiving non-taxable income. HMRC are adamant that such schemes do not work and they are likely to challenge anyone using them.
In a contractor loans scheme, an individual is paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust. The payment is not made directly by the engaging company, and will be diverted through a chain of companies, trusts or partnerships. Scheme promoters have claimed that payments are non-taxable, because they are just loans and don't count as income. However, since the loan is not paid back, the payments are to be treated as normal income and should be taxed accordingly. Those who use such schemes are highly likely to be regarded by HMRC as participating in tax avoidance arrangements, and this could result in additional taxes, penalties and interest becoming due.
In their guidance on the use of contractor loan schemes, HMRC specifically refer to the case of Boyle [2013] TC 03103, where the taxpayer's appeals against discovery assessments and/or closure notices in respect of a scheme for 'soft currency loans' from his employer, an Isle of Man company, failed. The Tribunal determined that the loans were not genuine and the money paid to Mr Boyle as loans was 'in substance and reality income from his employment' and therefore taxable.
All contractor loans schemes must be declared to HMRC and a scheme promoter is required to provide users with a scheme reference number. However, since HMRC never 'approve' schemes, the reality is that the reference number merely identifies users, which in turn, challenges HMRC to investigate it! HMRC are keen to point out that they win around 80% of avoidance cases that taxpayers take to court, and many more users choose to settle their affairs before that stage.
It is highly likely that an individual using a scheme will receive an 'accelerated payment notice' (APN) from HMRC, requesting them to pay tax and NIC up front, whilst the scheme is being investigated.
HMRC point out that they may contact a scheme user's clients to check their position relating to the contract. This may put vital working relationships at risk. They may also seek information provided to mortgage providers and other creditors about loans from schemes. If the level of income on your tax return is lower than the income disclosed on a mortgage application, HMRC state they may seek penalties.
HMRC strongly advise anyone using a scheme to withdraw from it and settle their tax affairs. There is a contractor loans helpline (0300 534 226) for anyone requiring further assistance.