HMRC publishes fresh guidance on contractor loan schemes

HM Revenue and Customs (HMRC) has made amendments to its guidance on contractor loan schemes, reinforcing that loans paid to contractors or freelance workers via umbrella companies or trusts are subject to tax in the same manner as any other personal income.

HMRC states that while contractor loan scheme promoters indicate the payment is non-taxable due to it being a loan – and therefore not counting as income – in the tax authority’s eyes the it is no different to normal income as the individual does not pay the loan back and should therefore be taxable.

HMRC warns individuals it will continue to challenge such schemes by issuing accelerated payment notices (APNs) to those where the amount of tax due is in dispute.

The renewed guidance states that if the contractor loan was paid through a remuneration trust, there is a possibility the funds may also incur an inheritance tax liability at some stage. HMRC states that during any investigation into a contractor loan scheme, the authority will ask to see information the individual in question provided to their mortgage company and any other creditors.

The guidance says: “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.”

After Budget 2016, which addressed a multitude of issues related to disguised remuneration, HMRC issued a policy paper on the subject, stating:

“The Government is also committed to ensuring that those who have used these schemes in the past aren’t allowed to get away with it.

“To meet this objective, the Government will introduce legislation to put beyond doubt that all loans or debts from a disguised remuneration scheme will be taxed as earnings if they haven’t already been fully taxed or repaid on or before 5 April 2019.”

For further information, look at HMRC’s ‘Contractor tax: loan schemes can cost you more’ hub page here.

Last updated: 11th July 2016