Contractor loan schemes: HMRC is clamping down on what has proved to have been a highly popular PAYE and NICs avoidance scheme favoured by many UK agency workers.

Over the last decade a tax avoidance scheme has been heavily sold to contractors and other professionals who would normally provide their services as agency or temporary workers in the UK:

  • The individual enters into a contract with an offshore agency which provides the contractor with work in the UK.
  • The UK end-client pays the offshore agency directly, and after charging a fee to the individual, the agency or its related company pays a salary to use up the individual's UK personal allowance together with agreed expenses allowances to the individual topping the balance of the individual’s expected earnings as a worker with loans.
  • The loans are never repayable and the plan is that they are deductible against the individual's estate on his or her death. The argument used by the offshore agencies is that the loans are not salary, they are not subject to PAYE/NICs.

HMRC say that they have started challenging these type of arrangements and individuals using these schemes may have received letters opening enquiries into their recent returns. Over the coming months, HMRC will be sending tax assessments to those who have used these schemes between 2008 and 2011.

If an individual receives an assessment they can either:

  • Accept the assessment and pay the tax due.
  • Appeal against the assessments have the case heard by an independent tax tribunal, if no agreement is reached with HMRC.

My Tax Return Catch Up campaign

If an individual who has used an offshore loan arrangement is worried about the outcome of an HMRC enquiry into their affairs they can use HMRC’s My Tax Return Catch Up disclosure opportunity to submit tax returns for 2008 on and avoid penalties. This opportunity is not available if HMRC has already made an assessment for back taxes.

Help or assistance with a tax enquiry, making an appeal to the tax tribunal or tax penalties? Contact our Virtual Tax Partner support team.

Links: HMRC Contractor Loan Schemes

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