What is the 2019 Loan Charge and how could it impact your candidates?

HMRC is continuing to step up their efforts to recuperate unpaid tax through schemes that they deem as tax avoidance or tax evasion. The Finance (no. 2) Act 2017 included important information about how HMRC is investigating schemes that promoted disguised remuneration and are targeting the individuals who decided to use them. The 2019 Loan Charge may be about to dig up some forgotten skeletons in your candidates’ closets and our blog will explain why and what they must do if they believe they have got caught up using a loan scheme.

What is the 2019 Loan Charge?

The 2019 Loan Charge has been introduced by HMRC to recover unpaid taxes by people who have used disguised remuneration schemes involving loans since the 6^th of April 1999. If your candidates have used such an arrangement since the 6^th of April 1999, they will be required to pay back what HMRC deems them to owe by the 31^st January 2020.

What schemes are associated with the 2019 Loan Charge?

The 2019 Loan Charge is targeting disguised remuneration schemes that have involved loans. These include, but are not limited to, Employee Benefit Trusts (EBT), Employer Financed Retirement Benefit Schemes (EFRBS) and Contractor Loan Schemes or Arrangements. Some of the loan schemes may have had more interesting and original names as the practice became more common and companies seemed to appear overnight, targeting business owners and contractors in particular.

An example of disguised remuneration through a loan scheme

Below is a very simplified example of how a loan scheme may have operated 15 years ago.

1. Your candidate is operating through either a personal service company (limited company) or non-compliant payroll provider.
2. They are paid £3,000 by their client for the work they carried out in the month.
3. They engage with an EBT to deliberately reduce their tax liability because they are not happy paying the expected amount of tax.
4. They allow the EBT to take their £3,000 and pay it back to them, in full, as a loan.
5. The loan has been paid with the mutual understanding that it will never be paid back again.
6. There has been no tax paid on the £3,000.
7. The EBT takes a percentage of the £3,000 as their fee.
8. Your candidate has disguised remuneration.

It can get very complicated

Our example has been done as simply as possible. However, the situation for your candidate can get very complicated if:

• Interest on the loan has been amassing
• HMRC is already investigating
• Accelerated payments have been made
• The loan has been fully repaid because this does not necessarily mean that the agreement that was in place has run its course.

How much is the government looking to recuperate?

Unpaid taxes and schemes designed to fool the taxman are costing the government billions of pounds every year.

Since 2010, HMRC has introduced over 100 processes aimed to reduce tax avoidance/evasion and it believes these have helped “secure and protect over £175 billion in tax that would otherwise have gone unpaid.” The Finance Bill 2017/18 will look to recover tax and reduce further tax avoidance and evasion to the value of an estimated £1.2 billion. It is no wonder HMRC are taking tax avoidance and evasion so seriously.

What are the options for your candidates who think they may have engaged with loan schemes in the past?

• A settlement agreement with HMRC – your candidates must register their intention to settle with HMRC as soon as possible before 5th April 2019. This deadline was previously 30th September 2018 – but HMRC is still allowing those affected to register for settlement after this point. The sooner affected candidates register their interest to settle, the more likely HMRC will have time to reach a settlement agreement. Settling will be the best option if your candidates want to keep on the right side of HMRC, but they must be prepared for a tough time ahead because HMRC will not be providing them with any discounts.
• Waiting and doing nothing – as HMRC has proven, its efforts to catch tax avoiders are only getting better. Therefore, if your candidates decide to wait it is unlikely they will be waiting long until HMRC make formal contact with them and they are hit with the 2019 Loan Charge.
• Challenge the advisers – your candidates will need to think long and hard before they decide to start challenging their involvement with a loan scheme. HMRC will not allow ignorance as an excuse to get out of paying the outstanding tax. It may be the case that their agency forced them to use a loan scheme and if this is true, your candidates may be able to file a professional negligence claim.

Recruitment agencies must be responsible

Facilitating tax avoidance or evasion could land your recruitment agency in serious trouble. The introduction of the Criminal Finances Act 2017 means it is now an offence to refer your candidates to non-compliant payroll schemes.

By referring your candidates to Churchill Knight, you can be assured they are in the best hands. This year we are celebrating 20 years as a leading provider of contractor accountancy and payroll. We are proud to have never offered or promoted a tax avoidance scheme and we have written a series of guides exclusively for recruitment agencies explaining all of the complicated legislation that affects your business and the employment industry. They can be downloaded for free.

To find out the benefits of referring your candidates to Churchill Knight, click here. Alternatively, please give us a call on 01707 671645 or email agency@churchill-knight.co.uk.