Consultants and freelancers facing huge tax bills as the 2019 Loan Charge draws nearer

With the Autumn budget just weeks away, the Loan Charge announced by Chancellor Philip Hammond in 2017 has come into sharp focus.

October 10th 2018

The charge relates to those individuals who may have used ‘disguised remuneration schemes’ in order to reduce income tax, with thousands of freelancers and contractors expected to be affected by the retrospective rules.

The charge relates to those individuals who may have used ‘disguised remuneration schemes’ in order to reduce income tax, with thousands of freelancers and contractors expected to be affected by the retrospective rules.

Whilst it can be difficult to put aside the ethical arguments surrounding tax avoidance, try to imagine if you were presented with a tax bill you didn’t even realised you owed.  The tax bill turns up on your doorstep, stating that you owe many years of Pay As You Earn (PAYE) and National Insurance Contributions (NIC), plus interest – and demands payment in short order.

Imagine you had been following expert advice and were employed in an environment where you and your colleagues’ earnings were paid in that way as standard, with the full knowledge of everyone involved, be it within a large corporate or institutional environment.

Even though it would have occurred to you that this was an unconventional situation, the fact that the employer was not inclined to bring you onto their payroll was normal practice, and the arrangement was beneficial to you.

That’s what tens of thousands of contractors have been, and are currently faced with.

For the vast majority of those involved in the ongoing war on tax schemes, finding yourself embroiled in the battle is potentially life-changing.  Most people recognise that they need to pay what is due. Many have received accelerated payment notices for significant sums and are shocked when they realise that this was merely the tip of their own personal iceberg.

Others are dismayed that they are facing an accumulation of bills, some dating back over 15 years ago to the mid 2000’s.  Thousands who have sought settlement figures are stunned by the vast sums that they are told that they owe, not to mention the news that the loans under which they were paid will be subject to inheritance tax when they are closing them off.

Many are now facing bills in excess of £100,000, £250,000 and beyond.  Yet those who are affected by these charges are not the uber-wealthy; they are in the main seasoned professionals across a vast range of the UK’s industries, who now must brace for the financial impact which could include the loss of their homes and potentially bankruptcy.

HMRC have sought to offer a five-year payment plan, which is helpful for some but relies on the individual earning less than £50,000 (before tax) in 2018/19 to be agreed as standard.  But how can someone earn £50,000, support themselves and their family, and repay a £100,000 bill in five years?

HMRC will consider longer periods if you can satisfy them that you are committing all you can to repaying the liability.  This will include any equity you have built up in property, savings, any other assets, and your income.  In order to obtain the funds from these assets you will be required to pay any additional taxes that arise.  For example, PAYE, NI or dividend tax on earnings, or capital gains tax on a property that you decide to sell to repay your tax debt.  There are no reliefs or allowances and you can’t pay gross. HMRC will not compromise on a counter avoidance liability, and are not willing to accept less than 100p in the £.

Those seeking settlement but recognising that they cannot meet the liability are now faced with the 2019 Loan Charge that will apply a tax charge to all outstanding loans.  So for them, it’s settle or bust? Or bust or bust if you cannot settle? Or to carry on and try and find a solution that avoids both? Time is short and April 2019 is fast approaching.

One of the biggest challenges the war on tax avoidance faced, and one of its main goals, was the hope that the new systems would affect a change of behaviour, a culture-shift amongst individuals and corporates.  But now that this has been achieved it is for the HMRC and the Government to consider how they should change their behaviour, so that those caught up can do all they can to make amends, whilst maintaining their ability to productively contribute to UK society.