Contractors who have used disguised remuneration schemes in the past may be subject to the 2019 Loan Charge – retrospective taxation on a scale not seen before. We look at what this means for those involved.
Background to the Loan Charge
In recent years, disguised remuneration (DR) schemes were marketed to contractors in many industries – some promising take-home pay of up to 90%.
Typically in the form of an Employment Benefit Trust (EBT), these structures provided payment to their members in the form of tax-free loans (which were never repaid), rather than salaries.
Until recently, DR schemes were not targeted by the tax authorities as they may not have been operating outside the tax rules at the time, however The Finance (No.2) Act 2017 contains powerful measures which allows HMRC to retrospectively tax members of such schemes – going back almost 20 years.
Although some individuals used DR schemes purely to avoid paying tax, others were misled by scheme providers and marketers.
Disproportionate response by HMRC
The ICAEW says that HMRC should have taken action earlier against loan-based scheme providers, and regardless of the reasons why individuals signed up to DR schemes in the first place, the penalties for having done so are too harsh.
“Some people using DR schemes knew exactly what they were doing and were deliberately avoiding tax. They deserve little or no sympathy. In fact HMRC and the former Inland Revenue should have acted far sooner against these schemes. However, not all taxpayers are in this position: many were misled about the arrangements and would not have appreciated what they were doing. In their case, while their position needs to be regularised, we think they should not be so heavily penalised.
Growing opposition to the Loan Charge
An Early Day Motion (1239) against the measure was raised in May 2018 by Stephen Lloyd, MP, and has so far collected 62 signatures.
The EDM points to the fact that individuals served with Advanced Payment Notices have no independent right to appeal, that “retrospectively taxing something that was technically allowed at the time, is unfair”, and calls on the Government to revise the legislation to “avoid significant damage to independent contractors and freelancers in the UK.”
Worryingly, there have been a growing number of reports of contractors in serious distress due to the impending Charge.
The Loan Charge Action Group, a volunteer organisation, has written to HMRC Chief Executive, Jon Thompson, to take immediate action to prevent individuals affected from suffering serious mental health problems, as well as financial ruin.
The Group’s spokesperson, Richard Horsley, said:
“These victims never set out to avoid tax. They were simply following professional advice, often as a requirement of their contact employment. HMRC must accept responsibility for their implementing this policy and the consequences of doing so. The ‘vulnerable customer policy’ is not sufficient nor will it prevent mental breakdown or suicides, so they must set up a hotline and deal with the consequences of this policy and their unfair pursuit of people who are at risk.”
When will the Loan Charge 2019 apply?
The Charge applies to loans, or loan transfer arrangements where:
- The loan was arranged on or after 6th April 1999, and all or part of the loan remained outstanding on 5th April 2019.
- The loan was arranged on 5th April 1999, and would otherwise have fallen within the new disguised remuneration legislation.
What are your options if you are caught?
- Explore a settlement opportunity with HMRC. Individuals are asked to provide all required information by the end of September 2018. Find out more here.
- Repay the loan with cash by 5th April 2019, if the original loan provider allows it. This option would wipe out any potential tax liabilities.
- Pay the April 2019 Loan Charge. Understandably the outstanding PAYE and NIC liabilities may be very large, having built up over a number of years in many cases.
- Successfully prove that the scheme should not be subject to retrospective taxation. This is, unsurprisingly, an unlikely option given the professional resources required to mount such a challenge.
A petition has been launched to prevent the Loan Charge being applied retrospectively. It has over 2,000 signatures so far.
Protect your contract income - pay via your limited company
Tax-efficient life cover - your company pays the premiums - save up to 50%
Need a contractor accountant? - compare 30+ specialist firms