Thousands of self-employed individuals are now facing significant tax bills as the government step up their efforts to reclaim underpaid tax via the controversial Loan Charge.
Thousands of workers have been hit with massive tax avoidance bills
The BBC recently published an article about a contractor who is facing a £180,000 tax bill as a result of the controversial Loan Charge. John, as he has been named for the article, previously used a company to manage his tax affairs and admin – although unbeknownst to him at the time, it was, in fact, a tax avoidance scheme.
John is one of an estimated 50,000 people who are now facing substantial tax bills from using a tax avoidance scheme – whether knowingly or by mistake.
The Loan Charge has been met with criticism as contractors, like John, were often referred to these schemes by their accountant or recruitment agency with the assurance that the scheme was compliant with UK tax law.
Workers who were using these schemes would be paid a small proportion of their earnings as normal taxable income and the rest would be paid as a loan. The loan would not be subject to Income Tax or National Insurance Contributions (NICs) as it does not technically count as income – or so contractors were led to believe.
However, as these loans were never intended to be repaid, HMRC viewed the loans as no different to normal income. Therefore, tax and NIC deductions should have been applied to the loan.
The government has since closed this tax avoidance loophole and is reclaiming large sums of unpaid from contractors and freelancers via the Loan Charge.
What is the Loan Charge?
The Loan Charge was introduced in 2019 as a way for HMRC to reclaim underpaid tax from anyone who has used a tax avoidance scheme. The Loan Charge allows HMRC to reclaim underpaid tax from unsettled loans as far back as the 9th December 2010.
HMRC is continually stepping up their efforts to close down loopholes as they find them and reclaim underpaid tax. This is why you should never use a tax avoidance scheme – just because it is currently not known to HMRC, it doesn’t mean it won’t be discovered in years to come.
As many affected contractors and freelancers have now discovered, it doesn’t matter whether they used these schemes deliberately or were misled and have no idea it was a tax avoidance scheme – HMRC will reclaim every penny owed.
If an umbrella companies take home pay seems too good to be true, it probably is, and using that provider could land you in serious trouble with HMRC.
What happens if HMRC believes you have used a tax avoidance scheme?
If you believe you are currently using a tax avoidance scheme, we strongly advise you to withdraw from it immediately and notify HMRC as soon as possible to settle your tax affairs.
If you have previously used a tax avoidance scheme, you will be required to repay every penny of underpaid tax, as well as an undefined fine.
If HMRC sends you an accelerated payment notice, you will need to pay this upfront why they investigate the scheme. If the loan was paid through a trust, you will also be required to pay Inheritance Tax on the unsettled loan.
How to spot a tax avoidance or loan scheme
The good news is that there are some easy indicators to help you spot a tax avoidance scheme:
- They have been assigned a Scheme Reference Number (SRN) by HMRC;
- They advertise 80% – 90% take home pay retention;
- They claim to be “approved by HMRC” or “better than PAYE;”
- The companies registered office is in a known tax have such as the Channel Islands or the Cayman Islands.
We cannot stress enough the importance of conducting your own thorough due diligence before registering with an umbrella company, and ensure you do not get tricked into using a tax avoidance scheme.
Always use an FCSA accredited umbrella company for your payroll
The FCSA are independent auditors in the UK committed to compliance for the temporary labour market. You can rest assured that any company with an FCSA accreditation has had to pass a strict internal audit and their processes must adhere to the FCSA’s code of compliance and UK tax law. Umbrella Company UK has achieved FCSA accreditation as we believe there is no better way to showcase our commitment to compliance!
Umbrella Company UK operates in full compliance with HMRC legislation and UK tax law, so you can count on our expert team to support you through your contract work. Please give our friendly team a call on 01707 669023 for more information about our services.
