Contractor loan schemes – they’re just too good to be true

Contractor loan schemes are dodgy. They are classed as tax avoidance. Should you get involved with one, then you are likely to find yourself firmly in the HMRC spotlight, and face hefty fines.

“Retain as much as 90% of your income”, the loan providers said. If you’re the cynical type, then alarms would have started ringing, and the world-weary words of your elders – “nothing is free in this world” – would have come flooding back.

Unfortunately, many who like to see the good in people got stung. Up to 100,000 unexpected HRMC tax bills have landed on the doormats of contractors across the UK who signed up for contractor loan schemes. 40% of contractors who got involved have faced bankruptcy as a result.

What is a contractor loan scheme?

  • Providers advertise contractor loans schemes (sometimes disguised remuneration schemes) as a way in which contractors will pay less tax, and in turn, increase their take-home pay. The scheme pays contractors a small amount of their salary as a PAYE income, and the rest is paid in the form of a loan, which is claimed not be subject to tax or National Insurance contributions.
  • This payment (or ‘loan’) will not be directly paid by the company you’re providing work for but diverted through a chain of companies, trusts or partnerships.
  • Tax and National Insurance savings allegedly arise because it’s categorised as a loan, and not part of the contractor’s income. In reality, the loan isn’t paid back, so it’s no different to normal income, and it is taxable.

How to spot a loan scheme

  • If you’re any type of professional who works as a contractor, you could be offered a loans scheme and told that you could keep up to 90% of your income.
  • The provider may be claiming to be HMRC approved, which is false. HMRC will never pass a contractor provider loan.
  • You may be told that you don’t have to declare the scheme, which is also false.
  • The schemes are often registered off-shore.

What could happen if you use a contractor loan scheme?

  • Even if you unknowingly enter a contractor loan scheme, the fines can be severe. You may have to pay the disputed tax up front, plus Inheritance Tax.
  • Your mortgage and other loans are likely to be the subject of an HMRC investigation. If the income on your tax return is lower than the income on your mortgage application, HMRC may charge you penalties and interest, as well as the additional tax you should have paid.
  • Your reputation could be damaged. A recruitment agency that allowed contractors to be paid through a contractor loan scheme received national newspaper coverage – for all the wrong reasons.

What should you do if you already have a contractor loan scheme?

Contractor loans schemes must be declared to HM Revenue and Customs (HMRC).

HMRC strongly advises to withdraw from the scheme and settle your tax payments. You’ll avoid the costs of investigation and litigation, and minimise interest and penalty charges on the tax which wasn’t paid.

If you think you might be in a contractor loans scheme and want to settle your affairs, contact HMRC’s contractor loans helpline.

Telephone: 03000 534 226
Email: cl.resolution@hmrc.gsi.gov.uk

It’s essential that you act first, rather than waiting for HMRC to contact you or hoping that your contractor loan scheme will go unnoticed.