Blog Search

Archives

HMRC Focus on Contractor Loan Schemes

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.

  • Latest news and testimonials

  • Latest News

    • September Q&A

      Q. I have two small businesses which are treated as a group for VAT purposes, so we only submit a single VAT return covering both …

      Read more
    • Making Tax Digital for Business: update

      In July, the Government confirmed that the Summer Finance Bill would be published in September, with the measures dropped from the pre-election Finance Bill being reintroduced …

      Read more
  • Testimonials

    • Partner – Solicitor

      I have worked with SBL over the last 10 years on numerous matters involving owner-managed business. They are professional, personable, knowledgeable and work incredibly hard to provide the best advice to their clients. I would have no hesitation in recommending SBL.

      Read more
    • Director – Networking Company

      SBL are a professional Accountancy Firm and are exceptionally up to date with all legislations.  SBL know their clients extremely well and what will work best for their business. SBL understands business and how business works and they deliver the very best considered professional advice.

      Read more
    • Director – Retail/Fashion Company

      SBL have provided auditing and other accounting services for our company for more than 10 years. They not only offered excellent support from a professional accountant company, but also delivered forward-thinking advice on how to improve our business.