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.

Where does the ‘Budget for the future’ leave contractors now?

The Budget for the future?

It was billed as the Budget for the next generation, promising to offer long-term solutions to long-term problems. But what do Osborne’s plans mean specifically for contractors and freelancers?


After a weekend of media speculation, we tuned in at 12:30 today to find out exactly what the Chancellor had packed in the Red Box. Now we know. Here Intouch Accounting Director Duncan Strike, who is well used to unpicking the implications behind the announcements, identifies the three most important announcements affecting Limited Company contractors.


1. Personal service companies and the public sector

What transpired today was the announcement of a consultation that specifically targets contractors working through their own Limited Company for public sector bodies (including teachers and NHS workers).


In essence, if the consultation proceeds, this means:


  • the public sector body or agency paying the personal service company (PSC) must assess ‘employment status’
  • HMRC will provide ‘simplified tools’ for this purpose.


Furthermore, where employment status is found:


  • the fee due to the PSC, excluding VAT, will be reduced by 5%, then
  • Income Tax and Employee’s NI will be calculated and deducted before the PSC is paid
  • the PSC will no longer be responsible for Employer’s National Insurance (NI); this will be met by the client or agency
  • the combined deductions from the PSC and the Employer’s NI will be paid by the client or agency.


The proposed treatment of Employer’s NI is inconsistent with existing IR35 rules and it’s a wonder how this will be addressed in the final legislation. However, the principle of passing the Employer’s NI liability to the client or agency appears fair and likely to result in a proper consideration of status. Most consultations lead to legislation; it is reasonable to consider these changes will occur in substantially the way proposed.


It’s also likely that this or a separate consultation will look at IR35 further and in particular seek a simplified means of assessing status. We’ll be watching this space very carefully and reporting as the situation emerges and develops, as well as taking part in the debate.


2. Disguised remuneration and tax avoidance

For many years’ promoters of tax avoidance have offered tax schemes using Employee Benefit Trusts and loans to avoid Income Tax and NI. HMRC are to be given new rules that enable them to cancel out the tax advantage and possibly tax existing loans, remaining outstanding on 5 April 2019, in what might be considered a clever way of backdating the legislation. Contractors having used such schemes should be wary and prepare to consider the full effect as proposals develop into law.


3. Directors loans

The new dividend tax effective on 6 April 2016 means that dividends falling in the higher rate band will be taxed at up to 32.5%. Some commentators had identified that taking loans from your company may have offered a cheaper (tax) alternative.


The Chancellor has clearly identified this too and has now increased the tax on loans to directors or shareholders, taken from your company from 6 April 2016, to the same 32.5%..


Read more about the new dividends tax in our full ebrief.


We’ll be releasing our full Budget analysis tomorrow, specifically to help contractors and freelancers make sense of Osborne’s announcements. While we apply our expertise, tell us your initial thoughts about the Budget that Osborne believes puts family and future generations first.


Has George done enough to support small business owners? Share your reaction by leaving us a comment.


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.