Contractor Tax: Controversial Loan Charge of 2019

The Controversial Loan Charge of 2019

What is the Controversial 2019 Loan Charge?

It is highly unlikely that you have not yet heard of the controversial tax rule of the year. Popularly known as the contractor tax, the 2019 Loan Charge is a tax charge by the HMRC which was set in motion in 2016. It was targeted at recovering tax payments which were qualified as tax deductions through loan schemes, disguised salary, self-employments tax payment deductions, etc.

The tax rule covers all unpaid or otherwise unqualified relief from the past going as far back as 6th April 1999 to the 5th of April 2019. As a result, it covers loans, relief, deductions etc. which stretch the last 2 decades. As a result, tax relief from the past 2 decades for many self-employed people are now recalculated as outstanding tax payments.

Independent Contractor concept with hand

The 2019 Loan Charge Largely Affects Independent Contractors in the UK

Independent contractors, freelancers, and other types of self-employed people are the major percentage of affected people. This is because the definition of self-employed people as per the HMRC has changed.

Many independent contractors have unfairly benefitted from tax relief which is designed as self-employment benefits. As a result, as many as 50,000 individuals are estimated to pay back tax which was tactfully avoided over the last few decades by January of next year, 2020.

The problem is, the contractor tax avoided is not one which was done specifically to avoid taxes. Rather, they got involved due to the large amount of work, agencies, and third-party involvement in the contracting industry. In many cases, the contractors were completely unaware of the situation or its implications.

As per information available to the HMRC, as many as 65% of affected individuals work in the sector of business services and marketing consultation. So, these are professions such as management consultants, financial advisers and IT consultants, etc.

What is a Loan Scheme or Disguised Remuneration Scheme Which Has Fooled Many into This Contractor Tax Crisis?

Loan schemes or disguised remuneration schemes, as identified by the HMRC, is the act of devising schemes which allow you to keep your salary from being taxed normally. But this is not done a tax evasive scheme, rather it is presented to the general public as a form of smart accounting.

There are many different names such as interest free loans, employee benefit trust, employer financed retirement fund, etc. used for such schemes which are all ultimately target at the same goal – avoiding Income Tax & National Insurance contributions.

Find out if you should consider using an umbrella company!

These are done by promoters who often falsely refer to these schemes as the following:

  • “HMRC approved”
  • “tax efficient”
  • “compliant with tax rules”
  • “retain 80-90% of your pay”

As a result, the general public is fooled by the promoters of these schemes as something which is smart to do and adds a sense of legitimacy to them. Many umbrella companies are also at fault for the development of such schemes.

As an independent contractor in the UK, the contracting career is not really a solo job. Umbrella companies are the balance between permanent employment and independent contracting. But it is important to choose an umbrella company which is legitimate in all sense, not just for the convenience of you as an independent employee.

Let’s Find Out How The 2019 Loan Charge is Calculated

The calculation is quite simple!

All outstanding tax payments or the balance are calculated until 5th of April 2019. They are then treated as income earned for the tax year 2018/19. As a result, you are then liable for making the subsequent tax payments.

So, as a result for someone who has outstanding loans over the last 2 decades will be made to pay Income Tax and National Insurance contributions as if they earned it all in the tax year 2018 to 2019. As per the HMRC regulations, you would need to check the following things to get the value of your potential outstanding disguised remuneration:

  • payslips and/or invoices received while you had such arrangements in place
  • your employment or service contract during such period
  • loan agreements or documents related to such arrangements
  • bank statements during the period
  • P60 document
  • Written communication with such as trustees of a trust, etc.

As an independent contractor, or a limited company you will need a number of administrative works to be taken care of. Naturally, you will not be qualified to sort out or manage all the work that needs to be done. As a result, the best solution to save your time is choosing a contractor accountant. Contractor accountants are accountants who specialise in providing contractor tax advice and services.

You will get peace of mind and ensure that all tax affairs are sorted at all times to avoid surprises. It is important to choose the right accountant for proper financial advice and support. Do not refrain from getting in contact with a financial adviser, accountant or other tax professionals.

What to Do If You Have Done This in The Past

If you are an independent contractor, freelancer or self-employed person, and you have used such loans or schemes in the past, then you must declare yourself to HMRC.

HMRC has repeatedly asked self-employment people and contractor tax affected individuals to come forward and settle affairs before the 5th of April 2019. For any reason if you or any individuals who have not done it, will be required to pay the loan charge.

The information regarding your loan charge must be provided to HMRC by the 30th of September 2019 and your tax return for the year 2018/19 must be filed by the 31st of January 2020.

HMRC requires individuals to provide the following information for their loan charge declaration:

  • Name, address, telephone number and email address
  • The name of the scheme and additional identifiable information
  • Starting and ending date of schemes used
  • Any relevant HMRC case reference numbers
  • Disclosure of Tax Avoidance Scheme number
  • The total loan amount in each tax year, including any amounts repaid or written off
  • Any amounts of tax or National Insurance contributions you have already settled

Important!

Individuals will be subjected to further penalties if all necessary information is not provided correctly before 1st of October 2019. The penalty ranges from a minimum of £300 to daily penalties of £60 per day for as long as 90 days.

For fraudulent or incorrect information, individuals will be penalised by up to £3,000, even for intentionally undisclosed information or deliberate inaccuracy.

What Is Your Option If You Cannot Afford 2019 Loan Charge Repayments?

If you are someone who is affected and you are worried that you cannot afford to repay the loan charge. Don’t stay silent! Consult a tax adviser, accountant, or financial adviser immediately.

This is an extremely critical issue which can only snowball into bigger problems for you in the future. Not only the loan charge payments, additional penalties, etc. can incrementally increase your initial repayment amount. Do not exceed the September 2019 deadline.

You can also choose to seek assistance from the HMRC. 

“HMRC can help those who are genuinely unable to make a full payment of tax owed on time. We can agree payments by instalments and will carefully consider an individual’s ability to pay on a case-by-case basis. There is no maximum limit on how long someone can be given to pay what they owe, and this will be based on our assessment of income and expenditure.”

The earlier you seek advice or assistance, the more time or opportunity you will have to sort this issue before it gets too large for you to handle. HMRC are focused at coming at an achievable and suitable arrangement for the tax payer.

In addition to professional advice, you can also browse online for guidance and support regarding your contractor tax from fellow contractors or tax advisers and experts.

Independent Contractor written on a whitepaper after peeled off brown paper

Conclusion

This blog was written to inform you all about the Controversial 2019 Loan Charge. Also known as contractor tax. Although you may or may not have heard of it, it is something you must be aware of at this point. The 2019 Loan Charge by the HMRC in 2016, is targeted at the repayment of tax payments which were unlawfully qualified as tax deductions through loan schemes, disguised salary, self-employments tax payment deductions, etc.

The 2019 Loan Charge mostly affects most of the independent contractors in the United Kingdom. Now that you know what a Loan Scheme or Disguised Remuneration Scheme is and how you may have been fooled into getting involved, take the necessary actions.

The calculation is quite simple, whatever you have missed, you must repay now. If you have not yet told HMRC about your income or schemes you were involved in, do it NOW!

You can also choose to seek assistance from HMRC if you think that you are affected but cannot afford to repay the loan charge.

It is best that you seek assistance sooner rather than later!