Are you affected by the 2019 ‘loan charge’? Help is available

Most loan schemes seek to pay an individual for work done in the form of an interest free, non-repayable loan that is not subject to income tax or National Insurance contributions (NIC), rather than ordinary salary, which would be. HMRC call this ‘disguised remuneration’. HMRC’s view is that these schemes don’t work and indeed, in 2011, the law was changed to try and stop people using them.

However, scheme providers exploited various loopholes in the law, which meant that these types of schemes continued to be offered, including – increasingly – by some umbrella companies (e.g. intermediaries that assume the role of paying agency workers, rather than the agencies themselves) to agency workers like locum nurses and supply teachers.

The Government has recently closed these loopholes and given HMRC powers to impose a second taxing point for historical schemes, in the form of the April 2019 ‘loan charge’. This charge will basically affect anyone who used one of these loan schemes and who hasn’t paid the intended amount of tax over the last 20 years.

This is a very technical and difficult subject but in this article, we try and explain the aspects most relevant to those on lower incomes who have fallen foul of a loan scheme and set out some special considerations that might apply. The main thing to take away from this article is that help is available and although you may be worried about the situation you find yourself in and concerned about how to repay any tax owed, your best course of action is probably to speak to HMRC and ask them for help sooner rather than later. If you are on a low income, there may be help available from other organisations and we explain where to find this below.

How to get help

The first thing to say is that HMRC will only offer you help if you are no longer using loan schemes (or other arrangements that are designed to avoid tax) or are – but want to get out.

If you fall into the latter category, you may want to seek further advice or let HMRC (who have dedicated teams assisting people with loan scheme issues, both current and historic), support you in extracting yourself from a loan scheme, as necessary. They will also then help you work out and settle what you owe before the April 2019 loan charge is applied (more on this below). If you are not already speaking to someone at HMRC about your affairs, you can email [email protected].

If you really can’t face talking to HMRC yourself, then you could consult a professional tax adviser who will lead discussions with HMRC on your behalf. You can find one by using the Chartered Institute of Taxation’s Find a CTA tool or if you are on a low income, by getting in touch with one of the tax charities.

The tax charities, Tax Aid (for those aged under 60) and Tax Help for Older People (for those aged 60 and over) can provide free advice and assistance with loan scheme issues to individuals on incomes of £20,000 a year or less.

The background

In the last few decades, loan schemes have been used by employers and individuals in an attempt to reduce the amount of tax and NICs due to be paid. They are very complex and come in all sorts of shapes and sizes, but for agency workers they generally work something like this:

• a worker finds a temporary assignment through an agency, which then passes them over to an umbrella company to be paid
• workers are employed by the umbrella company which then supplies the worker’s services to an end-client
• the umbrella company invoices the end-client and retains a fee
• the umbrella company pays the worker a salary at, or just above, the minimum wage but below the limits for tax and NIC
• the balance of the money is paid to the worker in the form of a loan – this may have been via a third party like a trust.

Tax benefits arise, in theory at least, because the loan does not count as part of the worker’s employment income (other than as a benefit-in-kind charge on the loan – see below) and thus, provides the worker with the money tax-free. While, nominally, the loan is repayable, in reality, the worker doesn’t pay the loan back. HMRC say that these loan schemes don’t work – the money is no different from normal employment income and is therefore taxable and subject to NICs.

In 2011, legislation was introduced to try and stop people using these schemes. However, workaround schemes were developed to sidestep these rules. These new schemes were against the spirit, if not the letter of the law, and they actually grew in popularity after 2011.

HMRC did try to warn people about the risks of such schemes on many occasions including through its ‘Spotlight series’ e.g. PAYE and National Insurance contributions, Corporation Tax and Inheritance Tax: using trusts and similar entities to reward employees (Spotlight 5) and Contractor tax: loan schemes can cost you more (Spotlight 33). (Note that the term ‘contractor’ applies to agency workers as well as higher paid temporary workers e.g. IT freelancers that you might more typically associate with the term.) However, it is conceivable that many people will not have seen these warnings.

To put matters beyond all doubt, the Government has recently started to close the loopholes that were being exploited by loan scheme providers. They have also introduced a new rule to catch all those people that have benefited from loan schemes in the past and that have not, in HMRC’s view, paid the right amount of tax – the April 2019 loan charge.

What is the loan charge?

The loan charge means that HMRC will get a second chance to tax any ‘disguised remuneration’ loans made since 6 April 1999. This include loans made under umbrella company arrangements.

There are many complexities as to how this charge will be applied but basically you will be treated as if you received a notional amount of employment income on 5 April 2019 equal to the value of all the tax-free loans received since 6 April 1999 (provided they would have been caught by the recently beefed up anti avoidance legislation, had they been made on 5 April 2019).

However, the charge will not apply if income tax and NICs have already been properly accounted for – including under the settlement opportunity currently being offered by HMRC – more on this below.

HMRC have wide information gathering powers and are aware of most loan activity already – but as part of the loan charge rules, you will be required to provide as much information as you can about the loans you have received, to make sure they are all captured in the loan charge.

The amounts taken as tax-free loans over the years will be put together and taxed as employment income all in one year – 2018/19 – and at your marginal tax rate (e.g. 20%, 40% etc). As the amount is assessed as one lump sum amount, it will benefit from only one year’s worth of allowances and tax bands, despite the fact it may have arisen over a number of years. While, in theory, the charge falls on the employer to pay – see below – the likelihood is that the charge is going to be payable in line with the normal self-assessment tax return process – meaning any income tax due will need to be paid by 31 January 2020. Provided any tax is paid by this date, there will be no interest or penalties.

Why aren’t HMRC asking the umbrella company for the loan charge?

HMRC consider the loan charge as employment income and this means that there is a Pay As You Earn (PAYE) tax and NIC obligation on the employer. Under general principles, where there is a PAYE obligation, HMRC should seek to collect the tax from the employer in the first instance.

Whilst the initial liability falls to the umbrella company, the tax liability can be passed to individual workers by HMRC in the following circumstances:

• If the employer is located outside the UK (‘offshore’) and they have no UK tax presence, they are outside the PAYE net and you will have to pay the liability yourself via your tax return. Please note that ‘offshore’ includes the Channel Islands and the Isle of Man.
• Where the employer has been dissolved or no longer exists – again, you will be responsible for reporting the income and paying the tax to HMRC via your tax return.
• If the employer is still around and has the money to pay the loan charge, but HMRC are of the opinion that you received payments knowing that the employer had wilfully failed to deduct the amount of tax which should have been deducted from those payments, HMRC will try and collect the tax from you directly. This may be outside the self-assessment process.
• If the employer still exists but they are unable to pay. Where options such as giving employers time to pay are exhausted, and it is clear that the employer is unable to pay the outstanding liability, HMRC will issue a formal bill to the employer in respect of the unpaid tax. Once this bill has been unpaid for 30 days HMRC will try and collect the tax from you directly. Again, this may be outside the self-assessment process.

These exceptions will catch most loan arrangements, meaning that there is little point in relying on HMRC getting their money from the employer rather than you. Even if they do, the employer would then be expected to pass this cost on to you anyway. In the very unlikely event that it doesn’t, there are ancillary tax consequences for you (essentially, a benefit in kind charge on the basis that they have paid your tax liability…)

A small silver lining however, is that under these rules, the employer will probably remain liable for any Class 1 NICs due – you will not be liable for any Class 1 NICs due.

What are my options?

If you have been in a loan scheme in the past and have not yet regularised your tax affairs, realistically, you have two options: 1) pay the loan charge or 2) try and voluntarily settle any income tax that you owe with HMRC before the loan charge comes into play on 5 April 2019.

The second option might be the simplest and offer you the most certainty. You will have the chance to negotiate with HMRC as to what you owe and reach a manageable payment plan to pay your tax liability over time if you need it. There are no defined minimum and maximum time periods for payment arrangements and, indeed, HMRC have recently said that people with income under £50,000 can automatically get a payment plan of up to 5 years as long as you are no longer involved in tax avoidance. If you need longer to pay, this will be considered based on your individual circumstances.

HMRC have a large degree of discretion when it comes to settlements. It is likely that they will be sympathetic towards those who had no real control or tax avoidance motive over entering into these arrangements.

Detailed settlement terms have been published on GOV.UK (you should check the ‘contactor’ settlement terms, as these will be the ones most relevant to you as an individual settling your own liability).

The main things for those in umbrella company loan arrangements to note are:

• The amount assessable will be net of any scheme expenses – this means the often high fees retained by the umbrella company will be deducted before calculating the tax.
• employed contractors will not have to settle NIC liabilities, although HMRC may pursue the employer.
• interest will be charged both on historic debt and any debt carried forward under a payment plan (interest rates can be found on GOV.UK).
• penalties may be charged – based on a percentage of the tax ‘lost’ – although only in cases of careless or deliberate behaviour and not if you can show you took ‘reasonable care’ with your tax affairs (more information can be found in 'Penalties for inaccuracies in returns and documents').

Even if HMRC insist that your behaviour was careless, they are allowed to reduce a penalty or not enforce it ‘if they think it right because of special circumstances’; or may suspend all or part of the penalty for up to two years. This means they don’t ask you to pay it for up to two years and you may not have to pay it at all if you meet certain conditions for that period.

Furthermore, if you try and voluntarily settle any income tax that you owe with HMRC now:

• there should be double tax relief available – e.g. where you have paid a benefit in kind charge on the interest free loan (in many instances, the loans made as part of a loan scheme are interest free or attract a very low rate of interest. In some cases, an income tax charge on the benefit in kind of the loan having no/a low rate of interest, will have been paid by you).
• liabilities will be calculated with reference to the tax years the money was taken. If the loans were made over a number of tax years then the carving up of the loans into different tax years means there is more of a chance of there being some spare personal allowance or basic rate band available.

On the other hand, many agency workers move from assignment to assignment, and thus, around umbrella companies, quite a lot. It may be the case that you were only in a loan scheme for a short period of time. If your income is from one year only, you may pay less tax under the loan charge than if you settle now, as interest/penalties will not be due.

Taking a chance on the loan charge may also be a better option if it is clear that there was no collusion on your part, your umbrella company still exists, has the means to settle HMRC’s bill and would not require you to repay them (albeit we would have thought this unlikely…).

However, HMRC are less likely to consider concessions (for example, extended time to pay) for people they impose this charge on and interest rates in more recent years (when umbrella companies started to get increasingly involved in loan schemes) are comparatively low.

As the loan charge will be considered as employment income in the 2018/19 tax year, this may also trigger things like the high income child benefit charge and/or have knock on effects on any tax credits or other benefits you are on.

Basically, you need to weigh things up and come to a conclusion about what option is right for you. If you feel you need support to do this then we tell you where to get help at the beginning of this article.

If you decide you want to settle with HMRC, you should register your intention to do this with HMRC before 30 September 2018. To do this, you should email [email protected]. You will then receive a settlement pack from HMRC which must be completed and returned by 30 September 2018. The pack will explain what happens next and what information you need to provide. This should then give you the time you need to complete the settlement before the loan charge becomes effective on 5 April 2019.

Is there any way out of paying what I owe?

Some schemes have been created as an attempt to avoid the loan charge but HMRC have made it clear that they believe such schemes do not work and further costs and stress will be the likely result.

On 14 February 2017, HMRC published Spotlight 36. It states:

“Some promoters claim to have come up with schemes that enable users to get out of the loan arrangements and avoid the loan charge, in return for a fee.… These schemes don’t work. The only way you can avoid the new loan charge is by making a genuine repayment of the loan balance or settling the tax liability with HM Revenue and Customs (HMRC) in advance. Any repayments connected to a new tax avoidance arrangement will be ignored and the loan charge will still apply.”

Do I have any recourse against the agency who sent me to the umbrella company?

You may have grounds to claim back any money you have to pay to HMRC from the agency that found you the work. New laws have recently been introduced that mean such agencies, who insisted people be paid through ‘preferred’ umbrella companies that used loan schemes, may now find themselves in serious trouble. This is a complex area and you should seek legal advice so you understand it fully.