By Lynne Gowers on 23rd March 2017

Misleading loan schemes are still targeting contractors

contractor loan schemes

Contractor loan schemes are not “new” news but they’ve not gone away. Far from it, they are being aggressively promoted as a solution to contractors, particularly given the imminent reforms to IR35 in the public sector.

A number of our clients have got in touch to say they have been targeted by contractor loan schemes. Such companies lure you in with a promise of take home pay that is much higher than limited company or umbrella working. For anyone feeling the pinch, offers of up to 90% take home pay are surely tempting. Our advice? Avoid at all costs.

How do these schemes work?

Loan scheme companies work by paying you a salary with the rest paid as a loan (less their usually high fees). Sometimes you are offered a low salary from one company and a loan from another.

The problem is that as soon as the loan is written off it becomes taxable in full. If the loan is not written off, then you still owe the money to the scheme provider. This money can be called in at any time and at any point in the future. Some providers use an offshore loan claiming this escapes HMRC – it doesn’t!

A number of contractors signed up to this type of scheme in good faith after promises that when they left the loan would be written off. All good… until they receive a letter from the scheme provider reclaiming the debt.

There is also the risk of being hit twice for the debt. The “loan” is effectively a benefit in kind (BIK) and if it’s not declared on your tax return as income, you potentially face a huge tax bill and fine, on top of paying back the original loan.

These schemes keep evolving with new versions appearing all the time.
HMRC’s Spotlight 37 highlights a version where a scheme claims to avoid tax by using job boards and loyalty points paid by a third party. HMRC state the scheme doesn’t work and that they will challenge and investigate all users.

“It knocked me sick”

Contractors who have been caught up in these schemes have expressed their worries on a popular contractor forum. One contractor wrote, “Please add one more frustrated, sick and naive con to the list. I had a letter arrive Thursday and it knocked me sick. Stressed about it all day Friday only to find another when I got home. Not the most settled of weekends.”

While HMRC have already pulled the plug on many contractor loan schemes, others are still going – and we know that they are actively targeting contractors. While some are probably ok, most are likely to be on HMRC’s radar, and when they do get shut down, it will be done retrospectively. In the past we have heard of people racking up £40k + of unexpected tax debt.

The warning signs to look out for

A good rule of thumb is if something seems too good to be true, it probably is, but here are a few signs that the offer on the table isn’t quite right:

Alarm Bell #1 “If you join our scheme you can take home 80% to 90% of your income”

Don’t take their word for it – take independent advice on legitimate ways to maximise your take home pay.

Alarm Bell #2 “Our scheme is HMRC approved”

HMRC will NEVER approve such schemes and regards them as tax avoidance. They will challenge the scheme and recover correct tax from users.

Alarm Bell #3 “You don’t have to declare our scheme”

Scheme promoters are sure to roll out this line but again it is false. Contractor loan schemes must be declared to HMRC. When they are declared they are then given a scheme reference number. The promoter must pass on the reference number to anyone using the scheme.
If you are using a contractor loan scheme and you don’t show the correct scheme reference number on your tax return, you will be charged additional penalties.

Have you been targeted?

While we haven’t named any of the companies providing contractor loan schemes here, we are compiling a list of those who have targeted our clients. If you have concerns speak to your client accountant in the first instance.

Our final word on the matter is to keep your wits about you; these schemes can be extremely misleading and you will end up worse off one way or the other.

Got questions? Get in touch

Lynne Gowers Written by Lynne Gowers

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