HMRC are currently challenging some tax avoidance arrangements and in particular, those used by ‘one man band’ companies. You may be aware of schemes often referred to as ‘contractor loan schemes’ or ‘remuneration trusts’ which claim to avoid income tax by paying participants in the form of loans. Here we talk about this arrangement in further detail and some of the reasons it should be avoided.
How it operates: when an individual is paid in the form of a loan from a trust or company, this is called a Contractor Loan Scheme (sometimes referred to as a remuneration trust). The engaging company does not make the payment directly. Instead it is diverted through a chain of partnerships, trusts or companies. Because these are loans (and don’t count as income), scheme promoters claim these payments are non-taxable. But because the loan is not repaid, the payments are to be treated as normal income & should be taxed. So anyone who uses these schemes are often regarded by HMRC as participating in tax avoidance schemes which could end in more taxes, more interest & penalties.
Points to note: all contractor loan schemes must be declared to HMRC. After that, the scheme promoter will receive a reference number, which must be given to all members of the scheme. If this reference number is not shown on your tax return, penalties will be incurred. Please be aware that even if a scheme hasn’t been declared you’ll still need to pay penalties, more tax & interest if you’ve used it.
Technically, HMRC doesn’t ‘approve’ schemes, so really the reference number only identifies the people involved, which then allow HMRC to investigate further. Be aware, HMRC win around 80% of all avoidance cases that go to court, and most will choose to settle before then.
Usually, someone using a scheme will be sent an ‘Accelerated Payment Notice’ (APN) from HMRC. The APN requests that they pay tax and national insurance up front, while they investigate the scheme.
Often HMRC will contact a scheme user’s clients to find out their position within the contact. Sometimes this can put people’s working relations at serious risk. HMRC can also seek out info from mortgage providers and other creditors. If the level of income on your tax return is lower than the income disclosed on a mortgage application, HMRC may seek penalties.
HMRC strongly advises anyone using a scheme to withdraw from it and settle his or her tax affairs. If you are looking for further advice, why not give us a call on 0141 345 2335.