Contractors loan charge and the taxation – what you need to know
Contractors who have engaged in disguised remuneration schemes over the past two decades have little time left to avoid potentially huge tax penalties, as the April deadline for the 2019 Loan Charge approaches.
In the Finance Act (No 2) 2017, Government introduced aggressive measures to tackle the use of disguised remuneration loan schemes, known as the 2019 Loan Charge. The charge targets payments in the form of a loan or credit from a trust or company. Payments are usually diverted through a complex chain of companies, trusts or partnerships. Those promoting and operating these arrangements 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.
Using these arrangements is a form of tax avoidance, even if you have been told by the promoter or your employer that this was not the case.
What is the 2019 Loan Charge
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. 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 please contact HMRC.
If you settle before 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
If you have used one of these schemes, or are unsure and want some further advice, then get in touch with HMRC as soon as possible. Get in touch if you need to discuss this in more detail. Further details can be found on GOV.UK.