Contracting and the loan charge 2019 – are you affected?

The 2019 loan charge is a retrospective tax law which seeks to collect taxes from anyone who worked via a contractor loan scheme in the past.

Loans paid by an Employee Benefit Trust (EBT) was a form of remuneration that meant no tax was liable on the sum loaned and the loan itself didn’t have to be repaid. Such schemes were widely used by contractors and often recommended as a legitimate tax loophole by payroll providers, tax professionals, and other third parties from 1999 onwards until 2010 when HMRC started closing them down.

Now HMRC is looking to collect taxes and NI contributions from anyone who used one of these schemes which they describe as tax avoidance.

From 5th April 2019, the loans will be treated as income and taxed as such, with all taxes due to be paid in full by 31st January 2020.

Any scheme user who doesn’t sign a ‘contract of settlement’ with HMRC before the 2019 April deadline, could be charged interest on the amount they are deemed to owe. By HMRC’s own estimates, 65% of those affected by the loan charge are likely to work (or have worked) in the business services sector, such as IT and management consultants.

How did it come to this?

Most contractors will have heard of IR35, a piece of legislation introduced in 1999 to prevent so-called ‘disguised employment’. A loophole in IR35 was soon spotted and gave birth to various employment umbrella arrangements such as EBTs.

Promoted by tax advisors and others at the time, the loans promised safety from IR35 to thousands of freelancers who are now being told, twenty years later, that the loan schemes were in fact invalid.

Unfair on contractors

Not surprisingly, the backdated loan charge has been heavily criticised. For example, MP Stephen Lloyd is challenging the legislation and has cross-party support. He’s described the loan charge as unfair and draconian.

Lloyd has stated that people who had acted in “good faith” were being punished due to imprecisely worded legislation, which meant agencies and tax advisers could take advantage of some loopholes and “flourish off the backs of honest contractors.”

He said he had been contacted by people who now face large tax bills and were frightened they were going to lose their homes and livelihoods as a result of the charges.

Example of a loan scheme arrangement

Following advice from a payroll provider, tax specialist or other third parties, a contractor agreed to be paid, for example, £4,000 for a month’s work via an EBT. The money was paid as a loan and as such wasn’t liable for tax. The EBT took a fee by way of payment and it was understood that the loan would never be repaid. This is a simplified example of how the loan scheme worked and the actual sums involved – and tax liability – can be huge.

What happens now?

HMRC has been writing to those affected by the loan charge 2019 and asking them to register their interest before the charge is implemented next April. They say flexible payment arrangements for taxes owed are available for anyone who has difficulty in making the payments.

Are you affected?

If you used a loan scheme, you may want to seek legal advice before committing to a course of action, as much will depend on your personal circumstances, the terms of the loan you took out, the advice you were given at the time, and the sums involved.

You can apply to postpone the date of paying a charge on any loans taken from 5th April 1999 to 9 December 2010, although you must first register your interest with HMRC and apply by 31st December 2018.

You can also try and agree a settlement with HMRC that will prevent the loan charge being implemented but act now as the 30th September 2018 deadline for doing this is fast approaching.

Of course, you can choose to pay the tax you owe now – HMRC claims over 5,000 people have already done so since the loan charge was announced.

Don’t ignore the loan charge

HMRC isn’t going away so choosing to ignore the loan charge isn’t an option. In the meantime, if you are still being paid via a loan scheme the best advice is to remove yourself as soon as possible. You can read further information on the loan charge 2019 here.

Partner Contractor Accountants

Last updated: 15th June 2019