Contractors and the loan charge

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Contractors who have been using schemes or arrangements, often known as contractor loan schemes, to minimise the tax they pay need to take action to avoid the new ‘loan charge’.

These schemes make payments in the form of a loan or credit from a trust or company.  You don’t get your pay directly from the company you work to. Instead it’s usually diverted through a complex chain of companies, trusts or partnerships.

Those promoting and operating these arrangements claim this will save you tax.  They will tell you the payment doesn’t count as income because it’s a loan or credit and is not taxable.

In reality, the loan is never paid back, so it’s no different to normal income and is taxable.

Anyone using arrangements which pay you in loans is avoiding tax, even if you have been told by the promoter or your employer that this was not the case.

HM Revenue and Customs (HMRC) has always said these payments are taxable. One of the ways the government is tackling these schemes is the new ‘loan charge’ which means people who have used such schemes will have to pay tax on the total amount of all loans taken since 6 April 1999 that are still outstanding at 5 April 2019.

If you have used an arrangement like this and you have an outstanding loan you can take action now to prevent being caught by the loan charge.  You need to either settle your tax affairs, or repay your loans in full before 5 April 2019. Acting now means you are likely to pay less than if you wait for the loan charge to bite.

This is because the loan charge works by adding together all of these outstanding loans and other similar credits and taxing them as income in one year.  The result is you are likely to pay tax at higher rates than you would have at the time you were paid in loans.

If you settle your tax affairs before the loan charge arises you will pay tax at the rates for the years you received your loans. Settling does not mean all the tax has to be paid in full before 5 April 2019 and anyone concerned can read the full details on how to settle online.

If you are worried about being able to pay the full amount in one go contact HMRC.

If you settle the loan charge you will be able to pay the settlement amount over a period of up to 5 years without having to provide detailed supporting information provided that:

·        your expected current year taxable income is less than £50,000 (for employees, this is your expected gross earnings, for self-employed people, this is your expected net profit)

·        you’re no longer engaged in tax avoidance

 

Arrangements that claim to avoid the loan charge

HMRC is aware that some firms and individuals are promoting arrangements that claim to enable people to escape the loan charge. These arrangements do not work and people are strongly advised not to sign up to them. 

. Any arrangements to avoid the loan charge, which seek to deceive HMRC as to what is really happening, may be fraudulent.

 

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