Over the past three months, HMRC has hit the headlines as they have aggressively stepped-up their continuing efforts to reclaim unpaid tax through specific schemes they now define as tax evasion/avoidance under law. The new 2019 Loan Charge changes adopted by HMRC go back to the Finance Act 2017 which empowered the Treasury to go after tax avoidance with fervour.
However, the Loan Charge will affect contractors and freelancers and the retrospective charges for loans paid back as far as 1999 could really impact people’s livelihoods and earnings. This is a short guide to help you understand what the changes are and how they could impact you as a freelancer?
What is The Loan Charge?
This is a newly introduced scheme that HMRC has created to help recover taxes that they believe have been unpaid by people who have utilised “disguised remuneration schemes” which involves loan-based payments since the 6th of April 1 999. If HMRC directs someone to repay such a loan – they have until the 31st of January 2020 to comply with the repayment agreement.
What Loan Schemes Are Linked To The Loan Charge?
As stated above, the Loan Charge is targeting “disguised remuneration schemes” that are loan-based payment structured schemes. The core types outlined to the Loan Charge are as follows:
- Employee Benefit Trusts (EBT)
- Employer Financed Retirement Benefit Schemes (EFRBS)
- Contractor Loan Schemes
There are other unique examples, but the above are the dominant schemes the HMRC have targeted in recent months. However, if you have operated through a loan-based payment scheme, HMRC could be knocking on your door very soon.
How Does “Disguised Remuneration” Work?
This is an example of how your client’s scheme could have operated near the turn of the last century. They could have setup a ‘personal service company’ with limited liability status or ran through a non-compliant payroll provider. This is how the ‘disguised’ element works:
- Your client is paid £1,000 for work carried out during a single calendar month period
- They collaborate with an Employee Benefits Trust in order to ‘reduce’ their tax liability
- The EBT then ‘claims’ the £1,000 and them immediately repays the same £1,000 back to your client but as a “loan”
- The repayment terms are agreed mutually with the understanding that the loan has no repayment end-date which means it doesn’t have to be paid back
- This means the £1,000 is now tax-free remuneration – minus the EBT percentage fee – this income is “disguised remuneration”.
It Gets More Complicated…
The above example has been designed to illustrate for lay people what disguised remuneration is all about. However, there have been incredibly complicated ways of making this ‘system’ even more byzantine. This has been achieved by the complexity of interest on loans, which have amassed regardless or the lax repayment terms. The scope of HMRC investigations on the EBT scheme. Then there are issues around accelerated payments which complicate the repayment terms. There are issues around terms continuing even after the ‘loan’ has been repaid. So, the complexity of the schemes available makes the Loan Charge investigation process cumbersome and difficult.
Why Are HMRC Taking Tax Avoidance So Seriously?
HMRC argues that since 2010, the legislative drive towards improved tax evasion rules has helped to “secure and protect over £175 billion in taxes that would have otherwise gone unpaid.” The Finance Bill 2018 is another legislative vehicle that will further enhance the collection mechanisms of the HMRC – with an eye to collect a further £1.2 billion in unpaid taxes. This is why HMRC are really pushing forward with the Loan Charge as it believes there are billions in unpaid tax from contractors who have used EBT and other vehicles to avoid tax.
What Can I Do?
The original deadline to agree a settlement was the 5th of April 2019 – which was pushed from September 30th, 2018. However, HMRC is still allowing settlements after this point. You will need to engage with an accountancy service, like Prestige Business Management, who can help you understand how your past loan scheme involvement could impact your current financial landscape. You need to engage as soon as possible with HMRC – the sooner you register your interest to settle the sooner you can get on the HMRC good books (which could mean a repayment discount). However, those who avoid early settlements will feel the full wrath of the HMRC’s legal clout.
Do not wait and do nothing! This is the worst possible course of action. Call Prestige Business Management today on 0203 773 2927 to discuss your own unique circumstances – remember ignorance is not an excuse and the HMRC will sooner or later come knocking. HMRC are investing more money and people into tackling tax avoidance and their abilities and reach are only getting better. Therefore, don’t wait, get in touch with Prestige Business Management who can, on your behalf, contact the HMRC and begin your settlement process.
Prestige Business Management is a professional accountancy full-service company that can help freelancers and contractors overcome long-term issues with the Loan Charge. We can help further by providing a full-range of self-employment, contractor or freelancer financial support services – from booking to self-assessment support. So, why not get in touch today to find out how we can help you overcome the Loan Charge in 2019?