Taxation of monies received by Contractors via a Contractor Loan Scheme.

Inter-Action of the Settlement Opportunity and the April 2019 Loan Charge

 Contractor Loan Schemes have been in the news for a long time with no fixed route to concluding.   HMR&C, true to form, continues to create new obstacles, such as APNs, and to amend statute and introduce new law to aid its case and have now taken steps to ensure that Contractors finally resolve matters.   The most significant step is the introduction of the April 2019 Loan Charge which means that even those still pursuing Appeals in respect of Assessments imposed as a consequence of using a Contractor Loan Scheme will have to self-assess the Loan Charge and pay the consequential taxes that become due.

So, what will happen with the April 2019 Loan Charge?

If you have received a loan as part of any Contractor Loan Scheme arrangement, HMR&C consider that loan to be earnings and to constitute Disguised Remuneration which is fully taxable.   If you have settled with HMR&C by accepting their stance and paying, or agreeing to pay, the taxes then the Loan Charge will not affect you but, if you have not settled, the Loan Charge will be imposed next April.   The Loan Charge will usually cost more than settling with HMR&C under the opportunity presented and more than 20,000 Contractors have already committed to paying the lower amount.   The Loan Charge will:-

  • tax on all of your loans at one time irrespective of the years that they were made, inevitably ensuring higher rate taxes apply
  • if the total exceeds £100,000, which it will for the vast majority, will remove eligibility for Personal Allowances adding approximately £5,000 to the overall cost
  • incur penalties.

Avoiding The Loan Charge

It is not too late to avoid the Loan Charge by accepting the Settlement Opportunity which HMR&C say is now available until 30 September 2019.   In order to take advantage of this Opportunity, it is necessary to register your intention to settle with HMR&C and provide them with sufficient information about the loans that you have take to enable the liabilities to be computed.   You clearly need to have completed the process of reaching final agreement with HMR&C well before the Loan Charge takes effect next April.

There are a couple of circumstances in which the Loan Charge can be postponed but any application for postponement must be made before 31 December 2018.   The circumstances in which you can apply for postponement are either:-

  • approval has been obtained from HMR&C that the loan in question is classed as a qualifying fixed term loan

or

  • you have previously paid an APN in respect of the income on which the Loan Charge is based that is equal to, or more than, the outstanding loan balance.

Moving Forward

The good news for Contractors is that the Loan Charge can be avoided but it depends entirely on settling liabilities on earnings with HMR&C.   Cobham Murphy Limited is well positioned to help with all aspects of the Contractor Liabilities and, in particular, can advise on:-

  • The Settlement Opportunity
  • The Loan Charge
  • Loan Charge Postponement
  • Ongoing appeals