Do you have a contractor loan as part of a tax avoidance scheme? Prepare for the new retrospective tax

Prepare for the new retrospective tax

 

Contractors have been expressing a dislike and unfairness for the new retrospective tax that they are to face on past loans associated with many of the tax avoidance schemes they may have taken advantage of.

 

So what is this tax, who’s affected and how can you check if you’re included? In this blog, Director of Intouch Accounting Duncan Strike, explores deeper and answers the most common questions surrounding tax avoidance schemes.

 

What is this new tax and where did it come from?

The last Budget has a lot to answer for. Deep within the depths of the documents, (chapter 5, paragraph 10 to be exact) it expresses the need to tackle the disguised remuneration avoidance schemes.

 

So what does this mean for contractors? In a nutshell, income tax and National Insurance Contributions (NICs) will be imposed on any disguised remuneration loans which span on or before the 5 April 2019. So if you took a loan years ago, you could still be caught up in this new tax of the loans taken that remain outstanding.

 

What is a disguised remuneration loan?

They come in two forms:

  •  Employee benefit trust (EBTs) loans – are used by company owners to take out sizable balances from their Limited Companies, without paying high levels of income tax.
  • Contractor loans – are where an individual receives a small salary plus a loan from an ‘employer’ that is usually based offshore.

 

Both types are repayable, but often there is no intention that they are to be repaid. The employee is taxed on the Benefit in Kind (BIF) of receiving an interest free loan, but not on the value of the loan.

 

How will it be enforced?

Any outstanding disguised remuneration loans where income tax has not been paid, will be subject to the new tax charge. This includes at the time whether income tax was due or not. It won’t, however, be imposed if a settlement has been reached with HMRC, or if tax was paid on the loan as if it was taken as a salary.

 

What else is there to be aware of?

  • Tax can be levied on any pre-existing loans of any age
  • Any old records of historical loans will probably have been lost and will be complex and difficult to reconstruct
  • Although many independent financial advisers and accountants sold contractor loan schemes, (Intouch were never in agreement that they worked) it’s the contractors who were sold them who will be the victims, that HMRC will go after
  • Tax will fall onto the employee/contractor – not to the employer

 

Many contractors (if not all) will see this new tax charge grossly unfair, as the tax that would be payable was not clearly outlined when the loans were originally made available. There is a real fear that it could make contractors bankrupt.

 

Many providers, including Umbrellas, may make extravagant claims to reassure their clients – but beware! Claims that sound too good to be true, usually are.

 

HMRC identify what to look out for

Whether they’ve been dressed up as wealth management products or exciting investment opportunities, HMRC are coming for them. So what should you look out for?

 

HMRC have provided a list of claims and statements, which should indicate that the intended arrangements are that of a tax avoidance scheme:

 

  • The arrangement falls outside the scope of tax avoidance
  • The scheme is not disclosable to HMRC
  • The scheme has been agreed by the Tax Counsel (QC)
  • The scheme has been disclosed and therefore you cannot be penalised
  • The service provider claims they have been offering the scheme for years and never been challenged by HMRC
  • The scheme allows you to receive tax-free payments which are compliant with tax law
  • The service provider claims they have won all claims brought against their scheme
  • IF HMRC send you letters in relation to their scheme, you will only receive a few, then the case will be dropped
  • HMRC do not recognise the scheme as tax avoidance
  • The service provider has a successful track record of implementation
  • The arrangements are legal and work, as per the decision made by the leading Tax Counsel
  • The scheme allows you to earn more and mitigate tax, by using tax efficient structures that are 100% compliant with the law
  • The scheme or service is low risk
  • Using the scheme means you’re fully insured against any defeat
  • HMRC have given the scheme a reference number, proving it is approved

 

Above all else remember that HMRC will never approve avoidance schemes or approve a scheme that produces tax-law compliant tax free payments, that Tax Counsel’s opinion is often flawed and HMRC will always challenge schemes they suspect have the intention of avoiding tax.

 

If you’re tempted by a potential tax avoidance schemes marketing, take a look at HMRC’s guidance on Tax Avoidance Temptation.

 

Alternatively, take a look at the top 10 things a tax avoidance provider won’t always tell you.

 

Above all else, ask yourself if it’s worth getting caught and paying more tax in the long run, than if you stayed compliant from the beginning.

 

If you believe you’ll be affected by the new retrospective tax, speak to your original provider first and then your current contractor accountant about what you can do to minimise the amount of tax you’ll have to pay.

 

Remember! If you are worried that the tax will apply, contact your accountant and if you are contacted by HMRC then don’t delay, speak to the experts.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

The new HMRC guide on tax avoidance schemes

The new HMRC guide on tax avoidance schemes

The majority of Limited Company contractors will generally steer clear of avoiding tax for the simple reason that it just seems safer to do so. However, a few may be attracted by the idea of saving large amounts of tax in a seemingly ‘safe’ way and may find themselves tempted by one of the many schemes on offer to do this. This can potentially be extremely risky though. If the scheme is deemed as being Tax Avoidance it’s worth remembering that HMRC will never approve it. Additionally, as a director of your Limited Company you could be held personally liable for the company’s tax and other debts if the company engages in tax avoidance which results in losses for the company. So, it pays to think very carefully about the management of your tax affairs and to get professional tax advice from your contractor accountant to ensure that you’re genuinely staying within HMRC’s rules.

Because tax avoidance can carry such heavy penalties and so many have been caught out in this area, HMRC provides Tax Avoidance Scheme guidelines to help.

What kind of activities amount to Tax Avoidance?

As long as you make legitimate use of the tax saving options available, management of your tax affairs to gain maximum tax efficiency is not a problem. Doing things like saving in a tax-free ISA (Individual Savings Account) or claiming capital allowances on assets you use in your business is completely legitimate and acceptable. What is not acceptable is using tax saving options in ways that were not intended or bending the rules to create tax savings where really they’re not applicable.

What do I need to look out for?

Generally if the scheme on offer sounds too good to be true it’s worth digging deeper to find out what’s really going on. No matter how attractive the sales pitch might be, Tax Avoidance is breaking the law so it’s better to be safe than not only sorry, but potentially deeply out of pocket, or at worst at risk of a prison sentence.

HMRC lists a number of ‘warning signs’ to look out for to help you spot potential Tax Avoidance Schemes including:

• the tax benefits or returns are out of proportion to any real economic activity, expense or investment risk
• the scheme involves artificial or contrived arrangements
• the scheme involves money going around in a circle back to where it started
• the scheme promoter either provides any funding needed to make the scheme work or arranges for it to be made available by another party
• offshore companies or trusts are involved for no sound commercial reason
• a tax haven or banking secrecy country is involved
• the scheme contains exit arrangements designed to side-step tax consequences
• there are secrecy or confidentiality agreements
• upfront fees are payable or the arrangement is on a no win/no fee basis
• the scheme has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime

HMRC also publishes details on their website of schemes which they are aware of and have concerns about.

What can I do if I’ve already joined a potentially suspect scheme?

Contact HMRC’s Anti-Avoidance Group on 020 7438 6733. Alternatively, email them using their online form.

Getting it right the first time with your tax management

At Intouch we give all our clients access to their own Personal Accountant. They fully understand the most tax efficient options available to efficiently maximise your take home income while fully complying with HMRC rules.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.