Private client tax partner RSM
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Contractors’ loans: Settlement terms have changed

20th Jul 2018
Private client tax partner RSM
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HMRC has amended the terms of the settlement agreement for taxpayers who want to pay the tax due before the contractors’ loan charge comes into effect in April 2019.

Contractor loan schemes (also known as disguised remuneration arrangements), were widely used for a number of years by small businesses and self-employed individuals involved in a very wide range of activities, from IT contractors to agency nurses.

The details of the schemes vary considerably, but at heart they involve earnings being paid to a non-UK entity such as a trust, from which the individual then took a loan. Many taxpayers who took out those loans now face ruin to pay the tax due.

Settlement offered

Following its success in the “Rangers EBT” case in the Supreme Court, HMRC contends that all of these loan schemes were ineffective, and has offered participators the opportunity to pay their tax liabilities via a formal settlement.

Anyone who does not settle with HMRC will either be subject to a tax charge on outstanding loans on 5 April 2019, or will be pursued for the amount originally paid into the scheme. In either case, HMRC is unlikely to be sympathetic to claims from the taxpayer that they don’t have the ability to pay the tax demanded.

Time to pay

It has always been a feature of the settlement opportunity that HMRC would consider “time to pay” arrangements as part of any deal, but the basis for this has not been spelled out. In an alteration to the published settlement terms on 18 July, HMRC have now provided more details on what it will consider before it agrees a time to pay arrangement. The revised HMRC guidance says:

“If the new loan charge will apply and you want to settle your use of these schemes before it takes effect, you can now pay the amount due over a period of up to 5 years, as long as:

  • Your expected current year taxable income is less than £50,000
  • You are no longer engaged in tax avoidance

HMRC explains that £50,000 is the gross earnings for employees, but net profit for self-employed individuals

If the taxpayer’s income is higher than £50,000 or they need a longer period to pay, HMRC will consider payment terms on a case by case basis.

There are no defined minimum or maximum time periods for payment arrangements, but HMRC will:

  • Take into account any changes in the taxpayer’s circumstances 
  • Take a realistic look at the individual’s income, assets and essential outgoings, alongside what he owes and any other debts
  • Consider how much he is able to pay, and over what period
  • Expect the taxpayer to pay the outstanding amount in the fastest possible time

Avoiding bankruptcy

There has been a real fear amongst people caught up in contractor loan arrangements that it will be impossible for them to pay the tax now due, and that this could lead to bankruptcy and the loss of homes.

HMRC’s announcement does not change the fundamental requirement that the unpaid tax must be settled, but it is a welcome acknowledgement that arrears can be settled over a sensible period, based on personal circumstances.

The extended payment arrangements are only available as part of a formal settlement, and this must be completed before 5 April 2019.

In practice, HMRC has a relatively small team of specialists involved in this work, and unless affected taxpayers move quickly to contact HMRC and open discussions, they may find that they run out of time to reach agreement before the tax becomes payable, and HMRC move to collect it.

Replies (2)

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By Kate Upcraft
26th Jul 2018 10:02

we (that is the payroll software developers group within the British Computer Society) met with HMRC on Tuesday as any outstanding loans on 5.4.19 have to be reported under RTI it has now emerged. The feeling at the meeting was that the expense of amending the FPS to accommodate an extra field for the few thousand contractors affected was disproportionate, as the costs could impact the license fee of software generally and the vast majority of employers will never have been involved in EBTs. We were reassured by HMRC that there was no mandation to introduce the new field into commercial software as the alternative would be for the original employer (should they still exist!) to report the outstanding amount via HMRC's Basic PAYE Tools that will carry the new reporting field

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