One tax avoidance measure that has been widely used in recent years is the “contractor loan” scheme.
Instead of being paid directly by the client, the funds to pay the contractor are routed through a series of companies or other related bodies, until they reach the contractor in the form of a loan. It is claimed by the promotors of these schemes that as the money is received in the form of a loan then it does not count as taxable income, and the funds are therefore received tax-free.
HMRC are currently looking into many of these schemes, and have recently issued new guidance. In their view the schemes are flawed and the funds are taxable as normal income as the loans are never repaid. They state that anyone who makes use of a contractor loan scheme will most likely be regarded as participating in a tax avoidance scheme, resulting in additional tax, penalties and interest becoming due.
Anyone who uses a scheme should be prepared to receive an “Accelerated Payments Notice” under which they are required to pay “up-front” the tax and national insurance that would become payable if and when HMRC’s view was upheld at the end of the enquiry.
HMRC specifically refer in their guidance to the case of Boyle [2013] TC 03103, where the taxpayer appealed against discovery assessments and closure notices in respect of a scheme involving a loan from an Isle of Man company. The taxpayer lost his appeal as the Tribunal determined that the loans were not genuine and the money paid to Mr Boyle as loans was ‘in substance and reality income from his employment’ and therefore taxable.
It is a legal requirement for any promotor of a contractor loan schemes to declare that scheme to HMRC, and to provide users with a scheme reference number. This does not mean that the scheme is “approved” by HMRC in any way, but simply identifies users of the scheme to HMRC and invites them to investigate it!
HMRC are keen to point out that they win around 80% of avoidance cases that taxpayers take to court, and many more users choose to settle their affairs before that stage. We currently have one client who made use of a contractor loan scheme and who has been approached by HMRC requesting details of any payments received under the scheme, as well as details of the loan agreement and any marketing material received.
We are currently in the early stages of replying to their initial enquiries. However, we understand that they may also request details of any loans from the scheme which were declared as income to any mortgage providers or other creditors. If the level of income declared on the individual’s tax return is lower than the income disclosed on any mortgage application, HMRC state they may seek penalties.
HMRC have set up a contractor loan helpline (0300 534 226) for anyone requiring any further assistance.