With the Government keener than ever to outlaw ‘aggressive tax planning’ vehicles – specifically those aimed at freelance professionals, HMRC has published a new document – “ten things about contractor loan schemes.”
In essence, unless you’re working via your own limited company or an umbrella company, it is possible that you could become a target for an HMRC investigation at some stage. And, even if a tax avoidance vehicle is ‘legal’ today, the Government may subsequently decide to tax schemes retrospectively. Many of the most well-known schemes used by contractors in the past remunerated their members in the form of ‘loans’ (not taxable) rather than salary and dividends (which are taxable).
Of course, these ‘loans’ were never expected to be paid back – so it is unsurprising that users of such schemes have subsequently been investigated, and many ordered to pay large amounts of back taxes to the Government.
Given that the UK’s contract workforce has been fertile ground for marketers of tax avoidance scheme in the past, this latest document is addressed quite specifically to this group of workers:
As a contractor or freelancer you may see adverts on the internet which claim you can avoid paying tax on the vast majority of your income.
The 10 things HMRC wants contractors to know about loan schemes
1. HMRC says that, despite what scheme promoters may claim, loans made to contractors who have signed up to such scheme are taxable.
2. HMRC never ‘approves’ such schemes. Any company or individual who sets up a tax avoidance scheme is obliged to obtain a DOTAS (Disclosure of Tax Avoidance Scheme) number. This simply means that HMRC has a record of the scheme’s existence. Unfortunately, over the years, we’ve seen many offshore schemes implying that they have somehow acquired official approval – ‘HMRC approved’, ‘100% HMRC approved’, etc.
3. Just because a scheme has not been registered via the DOTAS system (above), HMRC says that this doesn’t mean it can’t be challenged by the tax authorities.
4. HMRC claims that it wins 80% of all cases which go to court. However, although this sounds an impressive figure, it remains the case that the vast majority of DOTAS schemes have not been investigated.
5. The tax authorities are increasingly issuing Accelerated Payment Notices (APNs). Controversially, both members of some schemes under investigation, and those in ‘follower’ schemes are forced to pay in full any disputed taxes within 90 days, even before their cases have gone to court.
6. Interestingly, if you have been renumerated via ‘loans’ paid from a trust, there may be Inheritance Tax implications, according to the document.
7. HMRC says that it may need to discuss your case with your end-clients to determine the true nature of your contracts. Whether this is true or not, this is the type of information likely to concern even the toughest contractors out there.
8. HMRC says it may contact other creditors, such as your mortgage provider, to see if there’s a discrepancy between the income you have declared to HMRC, and the income you have declared to financial services organisations.
9. The document warns contractors that they are very much on their own when it comes to any potential investigations further down the line. “We have seen promoters disappear and leave contractors to deal with complex investigations on their own”.
10. At the 2015 Autumn Statement, the Chancellor stated his aims to raise an extra £5bn each year by tackling avoidance and ‘aggressive tax planning’. The document warns contractors not to be tempted by any variants of loan schemes, as all schemes are under the spotlight.
You can access the HMRC document here.