Rogue tax schemes have been hitting the headlines again, with HMRC serving huge retrospective tax demands on contractors who received their earnings through contractor loan schemes going back 20 years.
How HMRC is tackling non-compliance
Compliance in HMRC’s eyes
When any company employs somebody in the UK there are 3 tax deductions applicable in every case. These are:
- PAYE Tax
- National Insurance
- NIERS (13.8% payable by all employers).
HMRC view compliance as getting these taxes, therefore not getting these taxes is deemed as non-compliant.
So it may sound cynical but compliance is about HMRC collecting revenue for government spending.
Simply put, they want their slice of the pie and are increasingly willing to use their authority to get it.
When companies use unsanctioned tactics to reduce or even remove these tax payments to HMRC it is the definition of non-compliance. This is not our opinion this is HMRC fact stated within the finance act.
Most common non-compliant example – loan schemes
So, how do you illegally pay less tax? One answer is to pretend your income is something else.
The most common illegal scheme is a loan scheme. These work by pretending some of your pay is actually a loan.
Paying a low salary with a high proportion of pay paid as a loan… and the great thing is you will be told you never have to pay the loan back, they will just write it off.
Understandably HMRC got a bit miffed with this as it resulted in people paying 10% tax massively reducing their tax collections.
So, to fix this instead of HMRC fighting lots of individual cases they just decided to give themselves a new power the 2019 loan charge.
Loan charge “101” if you don’t pay back your loan to the company that gave it to you HMRC will tax the loan as if it were PAYE income, thus completely making the loan irrelevant from a tax avoidance perspective.
Liar liar – what tax scheme promoters tell contractors
These are the lines that scheme providers come out with time and again and should immediately set alarm bells ringing that what they are offering is far from legit:
“If you join our scheme you can take home 90% of your income”
The chances are they will sound very plausible, but make no mistake, this is not the long term outcome.
“Our scheme is HMRC approved”
HMRC will NEVER approve such schemes and regard them as tax avoidance. If the scheme has an HMRC reference number, this means HMRC are aware the scheme has been designed to avoid tax.
“You don’t have to declare our scheme”
Again this is false. Contractor loan schemes must be declared to HMRC. When they are declared they are then given a scheme reference number. The promoter must pass on the reference number to anyone using the scheme.
How bad is the problem?
The very fact the BBC picked up this story shows the scale of the problem.
HMRC is taking aggressive action against those who have used avoidance schemes in the past, including this type of contractor loan scheme.
It is having a immense impact on individuals, with many losing their homes and facing bankruptcy.
Contractor groups have even taken the step of calling on HMRC to set up a 24-hour suicide helpline to deal with the volumes of calls from people reporting suicidal thoughts as a result of huge retrospective tax bills.
A final word of warning
- If it looks like a tax scheme, and smells like a tax scheme, it usually is a tax scheme
- If something seems too good to be true, it usually is.