What is the loan charge and how is it affecting contractors?
The loan charge is a piece of legislation that was introduced by HMRC back in 2019, as a means to claim back tax owed to HMRC from contractors who had used a disguised remuneration scheme for tax avoidance. The legislation was poorly received by many and in this article, we provide an overview of what the loan charge is, how the criteria was changed following its widespread criticism, and what it could mean for contractors.
This article is for information purposes only, you should always consult with your accountant for any tax queries.
What is the loan charge?
The loan charge legislation was introduced by HMRC back in April 2019. The targeted contractors had used ‘disguised remuneration’ schemes to save on income tax and NICs, with the intention of recouping historical tax debt allegedly owed all the way back from the 6th April 1999.
The way the scheme worked was that contractors who signed up for the loan scheme would pay themselves a low salary, whilst the rest of their income came via a third-party ‘loan’, that was not intended to be paid back. This resulted in the contractors that used the scheme were able to take home up to 90% of their income.
HMRC is now claiming the tax owed back, by adding together all of the outstanding loans and taxing it as income in one year. At the time the loan charge was announced, it received heavy criticism – particularly around the fact that the schemes weren’t illegal at the time of use and just how far back HMRC can backdate the tax owed.
Due to the length the scheme ran for, the retrospective nature of the tax, and the timeframe HMRC was looking to go back on, many of the affected contractors are retirement age. There are contractor interviews detailed within Sir Amyas Morse’s report (which we’ll talk about a little further down) on the loan charge stating they’d had to sell their homes to be able to pay off the large amount owed. Devastatingly, the legislation has also been directly attributed to a handful of suicides as a result of the difficult financial position it has put some contractors in.
What has changed with the loan charge?
Due to the controversy surrounding the legislation, HMRC ordered a full review of the loan charge by Sir Amyas Morse, Auditor General of the National Audit Office. The full changes, although unfortunately too late for some contractors that were already affected, can be viewed here. We’ve provided a rundown below of the current metrics below:
– The loan charge would only apply to outstanding loans made on or after 9th December 2010, whereas initially, this was back to April 1999.
– Furthermore, should a contractor have made a reasonable disclosure of the use of the scheme to HMRC and HMRC did not take action, they would only be required to pay back outstanding amounts from the 6th April 2016 onwards.
– There is now greater flexibility on when the loan balance is subject to tax, with the option for individuals to spread the amount of outstanding balance evenly over 3 tax years (from 2018-2021).
– HMRC would also look to refund voluntary payments made for the previously eligible criteria (i.e. payments made for amounts owed before the 9th December 2010, and payments made for amounts owed before March 2016 if there was ‘reasonable disclosure’ of the scheme and HMRC did not respond).
No doubt, in response to the detrimental impact on the mental health and wellbeing of those affected, there is also greater flexibility in the ways the money is paid back. This is dependent on the person’s earnings, with different payment arrangements available to them.
How the loan charge could affect contractors
It is a relief that the scheme was reviewed, albeit too late for some affected. If you have been affected by the loan charge, you should have already received letters from HMRC last year letting you know the next step in the process. It’s worth noting that if you have paid loan charge fees before the December 2019 review, you might be owed money. You can view the eligibility criteria here and if you believe you are owed money that has not yet been received, you should speak to an accountant to learn more about your position.
The long-standing impact of the loan charge should also serve as a clear message for contractors to always be wary of tax avoidance schemes. As with anything in life, if it sounds too good to be true, it probably is. You should always discuss any changes to your tax responsibilities with a reputable accountant.