The 2019 Loan Charge was introduced on the 5th April 2019 as a way for HMRC to recoup tax from contractors and freelancers who have previously used disguised remuneration schemes.
What is the 2019 Loan Charge?
The 2019 Loan Charge is a way for HMRC to collect taxes from contractors and freelancers who avoided paying the correct amounts of tax through using disguised remuneration schemes. HMRC can collect taxes from as far back as the 6th April 1999.
What is a disguised remuneration scheme?
A disguised remuneration scheme involves an employer paying a contractor or freelancer indirectly through a third-party company (umbrella company) – often in the form of an offshore trust or tax avoidance scheme. When they are targeting contractors, they are often known as contractor loan schemes.
Unfortunately, at the time, these loan schemes were recommended to contractors and freelancers by many payroll providers as they were believed to be legitimate.
Disguised remuneration schemes claim to get around paying Income Tax and National Insurance Contributions (NICs) as the majority of the salary is paid via a loan or credit – which is untaxed. This is not the case as in the eyes of HMRC it is all a salary and is liable to tax and NICs. Therefore, if you use these schemes it is deemed as tax avoidance.
How to spot a tax avoidance scheme
If any of the following apply, it may be a tax avoidance scheme:
- The company claims you can retain up to 90% of your salary after NI and tax deductions have been made.
- The registered address is not in the UK.
- The company claims that payment is not subject to tax as it is a loan, pension scheme or job board points.
- You are paid a small proportion of your pay as a salary which is subject to tax and NI deductions and the rest in something other than regular pay, such as a loan, which will be untaxed.
Common types of tax avoidance schemes
Below are some examples of the most common types of tax avoidance schemes:
- Pension schemes – the majority of the salary is sent overseas and paid into a pension scheme. This can then be collected at a later date tax-free.
- Loan schemes – a small amount of the wage is paid as a salary and tax and NI are deducted. The rest of the wage is paid to the contractor as a tax-free loan (which is not expected to ever be paid back).
- Job boards – the contractor will be paid a minimum wage which will be subject to tax and NI deductions. The rest of the wage is paid via loyalty points for a job board, which is exchanged from tax-free cash.
What will happen if HMRC finds you have been using a disguised remuneration scheme?
If HMRC finds that you have been using a disguised remuneration scheme you will be required to pay back all the tax that they believe you owe. You may also be found to owe Inheritance Tax and National Insurance and will be required to pay it back where applicable. As well as paying back any tax owed, contractors may face additional penalties in the form of late payment interest.
In some cases, contractors are facing up to two decades worth of tax bills as well as possible substantial fines.
The loans will be grouped together and taxed at the current rate instead of the rate at the time the loan was entered – leaving the individual with a large debt to pay by the 31st January 2020 deadline.
Always seek professional advice
If you are currently using a disguised remuneration scheme it is advised that you remove yourself from it immediately and find a compliant provider.
If you believe you are affected by the Loan Charge it is best to seek a professional’s opinion or legal advice before taking any action. There are solicitors and specialists in the UK who have experience dealing with HMRC and settling tax-related claims. They will review your position and recommend the appropriate course of action to take in light of your circumstances.
Bluebird Umbrella operates in full compliance with HMRC rules and regulations
Bluebird Umbrella will never promote a tax avoidance scheme. Income Tax will be applied to contractors and freelancers at either a basic rate (20%), higher rate (40%), or additional rate (45%) on all income that falls above the personal allowance. Additionally, NICs will be applied (at 12%) to all earnings over £162 per week.
You do not have to worry about facing an unexpected tax bill further down the line from paying insufficient amounts of tax.