The Loan Charge

Introduction

Originally introduced in the 2016 Finance Act, the Loan Charge came into effect in 2019 to help HMRC reclaim underpaid tax by workers who have engaged with disguised remuneration schemes.

HMRC identified disguised remuneration schemes offering UK temporary workers a way of reducing their tax liability. Most commonly, a worker’s salary would be reallocated to them in the form of a loan which didn’t need to be paid back. This arrangement would result in the worker paying less than their fair share of tax and National Insurance Contributions (NICs) – or in some cases, no tax or NICs at all.

Is the Loan Charge able to punish workers retrospectively?

Originally, the Loan Charge allowed HMRC to reclaim underpaid tax since 6th April 1999. However, after an independent review by Sir Amyas Morse (December 2019), the retrospective date was changed. Now, the Loan Charge only applies to unsettled loans “made on, or after, 9 December 2010”.

Keep reading to discover more amendments that have been made to the Loan Charge as a response to the independent review.

Why have people chosen to use disguised remuneration schemes?

The Loan Charge has been heavily criticised for many reasons. While the legislation sets out to claim underpaid tax (which sounds fair enough), many workers have historically engaged with disguised remuneration schemes against their knowledge.

Here are the most common reasons workers have used disguised remuneration schemes in the past:

• The opportunity to keep more money and to pay less tax was enough to convince some people to use disguised remuneration schemes. However, it’s no secret that the tax system for contractors and freelancers is far more complex than for those in permanent employment. Therefore, some workers were fooled into thinking they had found something clever and legitimate, and, something that would not put them at risk of an unpaid tax bill in the future.
• They were pushed towards disguised remuneration schemes by their recruitment agency. Sadly, unethical recruitment agencies have been known to push their candidates towards disguised remuneration schemes because the scheme would pay them a lump sum for each candidate that registered. Therefore, candidates were often misled about what they were getting involved with, and many had no idea they were signing up with a tax avoidance scheme.
• Frustratingly, many disguised remuneration schemes claim that they’re “perfectly legal”. As a result, they trick workers into signing up with them. What they fail to mention is that while tax avoidance is technically legal, it could still land their clients in serious trouble.

What are the schemes associated with the Loan Charge?

The Loan Charge targets schemes that specifically involved loans. Therefore, the most common arrangements that HMRC have identified are:

• Employee Benefit Trusts (EBT)
• Employer Financed Retirement Benefit Schemes (EFRBS)
• Contractor Loan Schemes or Arrangements

Many disguised remuneration schemes appeared almost overnight and had eye-catching names to grab the attention of contractors and freelancers.

An example of a disguised remuneration scheme

Here is a likely scenario that could have occurred roughly 15-20 years ago between a contractor and a disguised remuneration scheme. We have simplified the processes involved.

• Your candidate is contracting through a limited company, or a non-compliant payroll provider (such as an umbrella company)
• They are paid for their monthly work – a sum of £4,000.
• The candidate contacts an Employee Benefit Trust (EBT) – because they want to pay less tax.
• They pay the £4,000 to the EBT, and the EBT then pays it back to them in full, minus a percentage or pre-agreed fee.
• The payment is paid to the candidate as a loan which is not expected to be paid back. Therefore, no tax has been paid.
• Your candidate has disguised remuneration.

What should your candidates do if they believe they’ve used a disguised remuneration scheme in the past?

HMRC is urging contractors and freelancers who think they have engaged with disguised remuneration schemes in the past to get in contact with them as soon as possible. HMRC may be willing to put a payment plan in place for those who approach them and are transparent.

If your candidates believe they were deliberately misled and pushed in the direction of an unethical scheme, they may be able to file a professional negligence claim. However, there are no guarantees.

If your candidates decide to do nothing, they could be contacted by HMRC and presented with a substantial tax bill. If this happens, HMRC is likely to demand the money immediately, and a payment plan will be out of the question. Such a situation could result in financial ruin.

HMRC announce a number of amendments to the Loan Charge

In September 2019, the government approached Sir Amyas Morse and asked for an independent review of the Loan Charge.

As a response to the review, the following changes were announced:

• The loan charge now applies to loans made on, or after the 9th December 2020 (rather than the original date of 6th April 1999).
• It will not apply to “outstanding loans made in any tax years before 6 April 2016 where a reasonable disclosure of the use of the tax avoidance scheme was made to HMRC and HMRC did not take action”.
• Multiple payment plans have been put in place to help those who are caught by the legislation and need to pay back tax to HMRC.
• “HMRC will refund voluntary payments (known as ‘voluntary restitution’) already made in order to prevent the loan charge arising and included in a settlement agreement reached since March 2016 (when the loan charge was announced) for any tax years where:
  • the loan charge no longer applies (loans made before 9 December 2010)
  • loans were made before 6 April 2016, and a reasonable disclosure of the use of the tax avoidance scheme use was made to HMRC and the department did not take action (for example, opening an enquiry)”

The changes above are currently draft legislation, and HMRC are planning to roll out the changes shortly

Please note: Text in italics has been taken directly from HMRC’s website and is available at the following URL:

https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review/guidance

Conclusion

The Loan Charge (2019) sets out to reclaim underpaid taxes by contractors and freelancers who have historically engaged with disguised remuneration schemes. While some workers will have behaved unethically, others were misled and almost tricked into using schemes that they had no idea was tax avoidance. As a result, the Loan Charge has come under much scrutiny.

Like many pieces of legislation, the Loan Charge has undergone an independent audit. As a direct response to findings by Sir Amyas Morse, multiple amendments have been made by the government and they’ll become official legislation in the near future.

With the introduction of the Criminal Finances Act 2017, recruitment agencies can be held accountable if they have facilitated tax avoidance – even by mistake. Therefore, your agency must have an up to date and compliant Preferred Supplier List (PSL). We recommend you only consider adding FCSA accredited accountants and payroll providers to your PSL.

We are also encouraging our Recruitment Agency partners to keep up to date with the latest news and legislation affecting the temporary workforce and staffing sector. The Loan Charge may apply to some of your candidates who have historically engaged with disguised remuneration schemes and they may require immediate support and guidance.