HMRC have stepped up their efforts to recover taxes it deems to be owed and have been unethically avoided via the new 2019 Loan Charge. The new initiative is specifically targeting thousands of workers who have used disguised remuneration schemes since 1999. This issue is pertinent due to the recent boom in non-compliant umbrella operators sucking in thousands of contractors into schemes affected by the loan charge. In this article we’ll explain what the charge is and its full implications.
What is the 2019 Loan Charge?
The charge is a method that allows HMRC to collect taxes retrospectively that it deems have been avoided through the use of disguised remuneration schemes. This retrospective tax collection can go back all the way to the 6th April 1999 with payment of all tax due required by the 31st January 2020 (the self-assessment tax return deadline). Contractors who have been paid via non-compliant umbrella companies using loan schemes are well within the scope of this legislation. Payments via such loan mechanisms will effectively be treated as income and taxed accordingly.
What has been the reaction?
To say the reaction to this move has been negative would be an understatement. The brutal reality is that the charge will likely cause major financial pain and potentially even bankruptcies due to the magnitude of the debts. This has resulted in a group of MP’s launching a motion to fight the 2019 Loan Charge insisting that it is fundamentally unfair. The group argue against retrospectively taxing individuals using such schemes which were technically legal at the time. The motion states that many affected people would have been coerced and manipulated into using the schemes by unscrupulous third parties. In all likelihood the resistance will go nowhere are HMRC is eager to clamp down hard on widespread tax avoidance.
How does the Loan Charge work?
All disguised remuneration schemes meeting the loan charge criteria will be taxed as income on 5th April 2019. These will be taxed at current income tax rates rather than at historic levels at the time the loans were transacted. Worst still HMRC has the power to additionally add extra interest to the debt in circumstances where it has historically opened up enquiries.
A real world example of disguised remuneration via a loan scheme:
- Mr Smith an IT contractor engages a non-compliant umbrella company provider who promises to increase his take home pay compared to other umbrella providers available.
- The non-compliant provider gives reassurances to Mr Smith that they are fully compliant and that their scheme is totally above board.
- Mr Smith is paid £3000 for a month’s work and enters into an agreement between himself, the umbrella provider and a loan provider.
- A small nominal amount of the money due is paid to Mr Smith through PAYE with only minimal income tax and NI deductions made in accordance with the relevant thresholds.
- The balance of the money due is paid to Mr Smith in the form of a loan which is non-taxable and with the understanding between the parties that it will not be repaid. The tax liability of Mr Smith is greatly reduced and umbrella and loan providers deduct their admin fees for the service.
- The above process can continue over many years amassing huge monetary values (in many cases six figure sums) which have been paid out in the form of loans. Under the new 2019 loan charge HUGE tax liabilities will be incurred via these schemes.
What to do if affected?
If you find yourself in the unfortunate position of having been paid via schemes captured within the scope of the loan charge you will need to move quickly in order to avoiding making your situation worse. We would recommend seeking professional legal advice before taking any action however. Professionals will be able to review your situation and help suggest the best possible action to take. It is vitally important that you DO NOT ignore the loan charge. If you are currently using a loan scheme it is advisable to leave it as soon as possible and move to using a fully compliant provider. If you find yourself being offered, enticed or pushed towards these schemes avoid them at all costs. The simple rule is…if offered more than 70% take home pay…avoid!
Established in 1994, FPS Group is one of the industries most trusted and compliant umbrella solution providers. Our umbrella solutions are fully HMRC compliant with full income tax and national insurance deductions made giving you unparalleled peace of mind. So save yourself the worry and choose FPS Group for your payroll.