Contractors' Questions: How do I know if I’m in a loan scheme?

Contractor’s Question: In light of the tax year in which the Disguised Remuneration ‘2019 charge’ arises starting this Friday -- on April 6th, I need to be certain about whether I am indeed involved in a loan scheme. What are the tell-tale signs that I am?

Expert’s Answer: Unfortunately, many contractors have continued to use these now- abolished offshore schemes.

The HMRC spotlight is currently on the health care sector where an advertised 95% plus in take-home pay has blinded people into using such unscrupulous schemes. Sadly, these schemes pray on the vulnerable and those seeking to maximise income, either through necessity or desire.

The schemes purport to pay a small salary and to offer a remainder of earnings through a loan arrangement. The loan amount is not taxable whilst it remains repayable.

HMRC has made it quite clear that they will not tolerate these arrangements and it has been proactively closing down such schemes.

As to your situation, it will be no defence to say that you did not realise that you were entering in to such an arrangement. In addition, HMRC has extensive powers to investigate non-deliberate avoidance and can now go as far back as 12 years. And if the scheme you are using is caught, the bill for non-paid tax will fall on you (the contractor), and not the scheme provider.

If you’re still struggling to tell if you’re in a loan scheme, have a quick glance at your payslip. If there is no standard PAYE and NI deduction, and the take-home pay looks upwards of 90% from the gross pay, the likelihood is that you are in a scheme.

The general advice we offer is – ‘stick to the rules’ and use a compliant provider. Your tax paid via the latter may seem higher than that offered by ‘alternative’ schemes but in the long-run, the compliant route is cheaper than the fines and penalties that can be added to outstanding taxes if investigated by HMRC.

The expert was Dan Moss, a director at contractor accounting specialists Orange Genie.