According to recent guidance published by HMRC, contractors and freelancers have been bombarded by promoters who make claims that they can help individuals take home up to 90% of their income using a contractor loan scheme. Broadly, promoters have been using this type of scheme to reduce the amount of tax paid on income by making payments which purport to be ‘loans’ from a trust or a company. Normally, a contractor would receive the contract income directly and pay tax on it. These arrangements artificially divert the income through a chain of companies, trusts or partnerships and pay the contractor in the form of a ‘loan’. The ‘loans’ are claimed to be non-taxable because they do not form part of a contractor’s income. However, in reality the ‘loans’ are not repaid and the money is used by the contractor as if it were his or her income.
HMRC are adamant that these schemes do not work and are strongly advising contractors and freelancers to keep well away from them. Individuals who have been using the schemes are being encouraged to withdraw and settle their tax affairs as soon as possible to avoid substantial penalties and interest charges being incurred.
HMRC have confirmed that this type of scheme must be declared under the Disclosure of Tax Avoidance (DOTAS) legislation, which means that the promoter is required to pass the scheme reference number (SRN) to all the users who must declare it on their tax return.
HMRC have added a new module entitled Contractor loan schemes – too good to be true (Spotlight 26) to their Spotlight series, which covers various tax avoidance schemes that HMRC consider to have wide tax implications. The module, which can be found here https://www.gov.uk/government/publications/spotlight-26-contractor-loan-schemes-too-good-to-be-true/spotlight-26-contractor-loan-schemes-too-good-to-be-true, may be of interest to anyone using, or considering using, a contractor loan scheme.