The Reality of Using a Tax Avoidance (Loan) Scheme 16 Dec 2020
As the government increases their efforts to reclaim unpaid tax from those who used one of the many controversial Loan Charge companies, thousands of self-employed workers are receiving significant tax bills.
BBC News recently published an article about a contractor who is facing a £180,000 tax bill as a result of the controversial Loan Charge. A self-employed individual they named John (for the article), had used a company to manage his tax affairs and admin which turns out to be a tax avoidance scheme. Although this was news to him and not his intention, he has received the massive tax bill.
It has been estimated that around 50,000 people are now facing substantial tax bills from using a tax avoidance scheme, whether knowingly or by mistake.
Contractors, like John, were often referred to these schemes by their accountant or recruitment agency with the assurance that the scheme was compliant with UK tax law and therefore did not question it.
How it worked is, workers would be paid a small proportion of their earnings as normal taxable income (usually minimum wage) and the rest would be paid as a loan although not to be repaid. As it is a loan it is not subject to tax and National insurance deductions and therefore their take home pay was higher. Unfortunately, they are now finding out that, that money is subject to those deductions and now have to pay it all back as HMRC viewed the loans to be no different to normal income therefore deductions should have been applied.
The tax avoidance loophole has since been closed by the Government and they are now reclaiming large sums of unpaid tax from the contractors and freelancers via the Loan Charge.
What is the Loan Charge?
The Loan Charge was introduced in 2019 as a way for HMRC to reclaim underpaid tax from anyone who has used a tax avoidance scheme. The Loan Charge allows HMRC to reclaim underpaid tax from unsettled loans as far back as the 9th December 2010.
HMRC are putting great effort into identifying open loopholes with the aim to close them and reclaim any unpaid tax. Therefore, we advise anyone who encounters a tax avoidance scheme, to not engage. Just because the company is not yet known by HMRC, it does not mean it will not eventually be discovered. And like the thousands of individuals are now finding, this could be years down the line and your tax bill could be financially crippling.
What happens if HMRC believes you have used a tax avoidance scheme?
HMRC will send you an accelerated payment notice which you will have to pay upfront whilst they investigate the scheme. If the loan was paid through a trust you will also have to pay the inheritance tax on the unsettled loan.
If you suspect you are using or have previously used a tax avoidance scheme, we strongly advise you to firstly, cancel all engagements with the scheme immediately and then contact HMRC to notify them of the company. You will be required to repay every penny of the unpaid tax as well as an undefined fine.
How to spot a tax avoidance or loan scheme.
The good news is that there are some easy indicators to help you spot a tax avoidance scheme:
They have been assigned a Scheme Reference Number (SRN) by HMRC;
They advertise 80% – 90% take home pay retentions;
They claim to be “approved by HMRC” or “better than PAYE;”
The company’s registered office is in a known tax haven such as the Channel Islands or the Cayman Islands.
We cannot stress enough the importance of conducting your own thorough due diligence before registering with an umbrella company and ensure you do not get tricked into using a tax avoidance scheme.