Despite extensive warnings from HMRC and the legitimate umbrella industry, contractor loan schemes are once again being heavily touted. Beware!
Promoters of such schemes clearly see contractors as a soft target. They use tax reforms, such as the forthcoming change to IR35 in the public sector, as a cynical opportunity to aggressively market their “solution”.
Certainly, promises of up to 90% take home pay are tempting to anyone. Don’t be fooled - the reason contractor loan schemes seem too good to be true is because they are.
Loan scheme companies work by paying you a low salary with a high proportion of your pay paid as a loan (less their usually high fees). Sometimes you are offered a low salary from one company and a loan from another.
The problem is that as soon as the loan is written off it becomes taxable in full. If the loan is not written off, then you still owe the money to the scheme provider. This money can be called in at any time and at any point in the future. Some providers use an offshore loan claiming this escapes HMRC – it doesn’t! See more on this
Contractors sign up to this type of scheme in good faith after promises that when they leave the loan will be written off. All well and good… until they receive a letter from the scheme provider reclaiming the debt.
There is also the risk of being hit twice for the debt. The “loan” is in fact a benefit in kind (BIK) and if it’s not declared on your tax return as income, you will potentially face a huge tax bill and fine, on top of paying back the original loan.
Contractor tax avoidance schemes keep appearing in various guises. HMRC’s Spotlight 37 highlights the latest version where a scheme claims to avoid tax by using job boards and loyalty points paid by a third party. HMRC state the scheme doesn’t work and that they will challenge and investigate all users.
While HMRC have already pulled the plug on many contractor loan schemes, others are still going - and we know that they are actively targeting contractors. While some might be ok at the moment, most are likely to be on HMRC’s radar, and when they do get shut down, it will be done retrospectively. We have heard of people racking up £40k + of unexpected tax debt as a result of being caught up in one of these schemes.
These are the lines that scheme providers come out with time and again and should immediately set alarm bells ringing that what they are offering is far from legit:
“If you join our scheme you can take home 80% to 90% of your income”
The chances are they will sound very plausible, but make no mistake, this is unlikely to be the long term outcome. Take independent advice on legitimate ways to maximise your take home pay.
“Our scheme is HMRC approved”
HMRC will NEVER approve such schemes and regard them as tax avoidance. If the scheme has an HMRC reference number, this means HMRC are aware the scheme has been designed to avoid tax. They will probably challenge the scheme and recover correct tax from users plus additional fines and interest.
“You don’t have to declare our scheme”
Again this is false. Contractor loan schemes must be declared to HMRC. When they are declared they are then given a scheme reference number. The promoter must pass on the reference number to anyone using the scheme.
If you are using a contractor loan scheme and you don’t show the correct scheme reference number on your tax return, you will be charged additional penalties.
We haven’t mentioned the names of any contractor loan scheme promoters here but we would be interested to hear of any who are targeting Liquid Friday contractors. If you receive unsolicited post or spam which looks like it could be from a scheme promoter, let us know.
Likewise if you have been involved with a contractor loan scheme and you have concerns or problems as a result, we might be able to help.