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HMRC cracks down on Umbrella Company loan schemes – Could the April 2019 loan charge affect you?

Posted on 06 December 2018

Overview:

Some umbrella companies promise that you can keep up to 80%, 90% or 95% of your income and still be tax compliant. Do this sound too good to be true? It probably is.

The HMRC views these as tax avoidance schemes and has now decided to take action by introducing the April 2019 loan charge. Umbrella companies use loan schemes to avoid paying tax for agency workers, such as locum doctors and nurses. This is referred to as ‘disguised remuneration’.

Do you think you might have been involved in a non-compliant tax scheme? Keep reading to see how you might be affected.

How do I spot a non-compliant tax scheme?
  • If the umbrella company promises you can keep 80%, 90% or 95% of your wages and still be tax compliant (this is highly unlikely to be true as the basic rate of income tax is 20% and National Insurance contributions (NICs) are also due) - if it sounds too good to be true it probably is;
  • if only a fraction of your salary is paid through payroll and subject to PAYE (indicating that you are only paying tax on a small proportion of your overall earnings);
  • if all or a large part of your payment is made in the form of a (non-repayable) loan without tax or NICs deducted (the umbrella company will tell you that the loan payment is non-taxable because it doesn’t count as income or earnings);
  • if payment from the umbrella company is routed through various companies before it comes to you - you’ll be told this is to save you tax; 
  • if HMRC has given the scheme a Scheme Reference Number (SRN). This means that HMRC has flagged the arrangement as having tax avoidance qualities – many scheme providers will tell you ‘SRN’ means the scheme has been ‘approved’ by HMRC, this is to hide the fact that the scheme involves tax avoidance.
HMRC has clearly stated that schemes which operate in this way, and replace income with loans, do not work; the money is no different from normal employment income and it should therefore be taxed and subject to NICs. Enrolment in an umbrella company loan arrangement will not make any difference to the overriding position.

What is the April 2019 loan charge?

The April 2019 loan charge enables HMRC to look at loans made under disguised remuneration schemes, including loans under umbrella companies. This will allow them to retrospectively apply income tax and NICs, together with interest and penalties to any loans made since April 1999.

The HMRC would normally seek payment of income tax and NICs directly from the employer, i.e. the umbrella company. However, the tax liability may be passed to individual workers if:
  • the employer is located ‘offshore’ outside of the UK; 
  • is unable to pay or no longer exists;
  • HMRC think that you received payments knowing that the employer had failed to account for tax. 
These exceptions are likely to catch most loan schemes run by umbrella companies, meaning HMRC could to come to you to satisfy any outstanding tax liability.

How will I be charged?

You will be treated as if you received a notional amount of employment income on 5 April 2019 equal to the value of all tax-free loans received since 6 April 1999 (assuming that they would have been caught by the new April 2019 loan charge rules if they had been made on 5 April 2019). This amount will then be subject to income tax and NICs at your marginal rate and will only benefit from one year’s worth of allowances and tax bands. This could result in a significant tax bill for those affected. Interest and penalties may also be levied for late payment of the loan charge.

Additional sanctions:

In addition to payment of the loan charge, HMRC will fully investigate your tax affairs and may also:
  • treat you as a high-risk taxpayer in respect of your future tax affairs;
  • take legal action if you fail to pay any tax and NICs that you owe; 
  • contact your mortgage provider and other creditors (if the income on your tax return is lower than the income on your mortgage application then HMRC may charge you penalties and interest as well as the additional tax you should have paid);
  • levy an Inheritance Tax payment if the loan was paid through a trust.
What to I do if I think I’ve been involved in a tax avoidance loans scheme?

You should get independent professional advice if you’re not sure whether or not you’re using a tax compliant scheme.

If you find that you are involved in this type of loan scheme arrangement, or have used one in the past, you should withdraw from it and settle your tax affairs with HRMC as soon as possible. You’ll avoid the costs of investigation and litigation, and minimise interest and penalty charges on the tax you should have paid.

You are also expected to report the existence of the scheme to HMRC; whilst HMRC are aware of most of these schemes already, reporting is important to try and limit penalties and surcharges.

You can contact HMRC to discuss your individual case and repayment options at cl.resolution@hmrc.gsi.gov.uk for contractor loan schemes or ca.admin@hmrc.gsi.gov.uk for all other disguised remuneration schemes.

DISCLAIMER: This communication has been prepared by Holt Doctors Limited for general information only. It is not intended to constitute professional or legal advice and you should not rely on its contents. Please seek independent professional advice.

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