Tax & admin · 3 June 2019

The loan charge: Is it fair to retrospectively demand tax payments?

VAT fraud

The 2019 Loan Charge, announced in the 2016 Budget and set to be implemented from this month onwards, will target contractors who avoided tax by using disguised remuneration schemes, and will seek retrospective tax payments from those individuals. HMRC has made significant changes in recent years to how contractors and hiring companies operate; they introduced the IR35 Off-Payroll rules into the public sector in 2017 and plan to roll them out into the private sector in 2020.

While contractors and companies alike are struggling to adjust to the new landscape, the loan charge in particular has come under significant criticism for how it will impact contractors.

Below we evaluate what the loan charge means for the contracting market.

What is the loan charge?

‘Disguised remuneration’ schemes were advertised by many third parties and allowed contractors to designate their income as loans, which are not taxed. HMRC created the loan charge to try and recuperate the taxes lost since 2000 through these schemes.

Options for contractors included reaching a settlement deal with HMRC prior to April 2019 or challenging the advisers and companies who sold the schemes.

The case for contractors

It is estimated that around 50,000 contractors will be affected by the loan charge. Using disguised remuneration schemes was a popular practice for many contractors over the last two decades and was believed by many to be legal, even being advised by big firms such as KPMG and PwC at points.

Contractors now face potential six-figure bills and many are anxious about not being able to pay back the amount owed to HMRC; with some even afraid they may have to declare bankruptcy or have their homes repossessed.

Commentators have criticised the detrimental effect the loan charge is having on contractors’ mental health, with many suffering from stress as they struggle to deal with the impending burden compounded by the lack of clarity and communication from HMRC.

The fact that only now, two decades after the introduction of such schemes, has HMRC decided to take action has confused and angered many in the contracting industry who have deemed the loan charge a disproportionate response.

Numbers of MPs have criticised the body for placing such a significant financial burden on contractors as well as the subsequent emotional impact.

Additionally, the Loan Charge Action Group has been set up by contractors to encourage a reconsideration of the loan charge.

The impact of retrospective tax payments

The loan charge is another dig at the contracting market following the introduction of the Off-Payroll rules in the public sector in 2017 and may well influence contractors to turn to permanent employment or other work.

The UK is suffering a skills shortage which will only worsen with the loss of highly-skilled and flexible contractors

skills shortage

Amid Brexit uncertainty, the flexible labour market and independent contractors are key to the competitive economy the UK needs.

Many wonder why the government is prepared to risk negatively impacting the contracting market with these heavily-criticised and retrospective regulations.

Following an enquiry from a House of Lords committee earlier this year, the Loan Charge APPG has released a damning report criticising the process undertaken by HMRC.

In tandem with the recommendations in the report, over one hundred MPs (as of this moment) have signed an open letter to the financial secretary to the Treasury, Mel Stride MP, urging him to immediately delay the loan charge.

As yet, HMRC are refusing to back down from enforcing the loan charge. No matter what occurs over the next few weeks and months, it is clear that the loan charge has seriously affected contractors who signed up innocently to accounting schemes and is causing significant distress to thousands of contractors.

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ABOUT THE EXPERT

Anthony Sherick is the founder of ContractorUK, the UK’s home for contractors. He has decades of experience in the contracting and recruitment market, specialising in technology and IT skills.

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