The controversial loan charge legislation came into effect this month. This legislation creates a new one-off tax charge on disguised remuneration loans made on or after 6 April 1999 if part or all of that disguised remuneration loan remained outstanding on 5 April 2019. Disguised remuneration loans are effectively taxable income paid to an employee which is dressed up as a loan to the employee (to avoid PAYE and NICs).
This loan charge has, of course, been known about for some time and has been used by HMRC as a way to encourage contractors to contact HMRC and agree settlement terms in relation to past loan scheme arrangements. Where no settlement has been agreed the loan charge could apply. The loan charge has been criticised by many commentators as unfair, not least because anyone who has been remunerated via a disguised remuneration loan since 6 April 1999 will face a retrospective charge for all outstanding loans in the 2018-2019 tax year. In some cases this is involving very large sums which some individuals (many of whom will claim they were just following advice from accountants without realising what it involved) may be unable to pay.
However, the key point for staffing companies and end-users is that they may also face serious risk of liability under legislation pre-dating the loan charge regime. You may need to take action soon if you are one of those intermediaries or end users.
This briefing explains why.
Why has this legislation been introduced?
Loan schemes have been around in one shape or form for many years. The motivation of the disguised remuneration rules, which were introduced in 2011, was partly to counter large scale loan schemes which existed at that time.
But loan schemes appear to have become widespread in some areas of staffing in more recent years. This has followed HMRC's increased focus on the taxation of contract workers , and technical changes which have closed down or vastly reduced the availability of various previously popular tax-efficient methods of paying contract workers. These recent changes have included:
- the 2014 offshore intermediary and sole trader legislation (which made sole trader arrangements much less attractive, and eradicated a lot of offshore employer schemes);
- the 2016 measures effectively preventing contractors engaged via intermediaries, such as so-called umbrella companies, being paid travel and subsistence expenses tax free; and
- the public sector IR35 changes of 2017 (which made it unattractive if not impossible for workers such as some teachers and nurses to operate via personal service companies).
These changes appear to have led to many contract workers instead being targeted by, and engaged via, new loan scheme providers, who promise them take home pay of up to 90% of gross pay. These loan scheme providers also target intermediaries (including staffing companies) who engage contract workers as well, trying to drum up referrals of contract workers by those intermediaries to their loan scheme.
The loan charge legislation is no doubt worrying to contractors who may have entered into settlement agreements with HMRC and therefore may be faced with having to pay a large tax bill already, or who may be facing a big new tax bill under the loan charge arrangements.
But the way the loan charge works and the existing 2011 disguised remuneration rules work may mean that where your contract workers have been using loan arrangements and you are an onshore employer, intermediary and/or onshore user of those contract workers, you may also face a liability for the income tax (via PAYE) and national insurance contributions (NICs).
Why might staffing companies (and end users) be liable?
Loan arrangements can result in taxable income which itself can be treated as "PAYE income". When that is the case, the existing rules place a burden on certain entities in the supply chain to pay such tax via PAYE and to collect the tax from the worker. The primary responsibility to pay is on the party liable to operate PAYE. Onshore entities and end-users could be liable, depending on the contracting arrangements within the supply chain. The position is normally the same for NIC.
The new loan charge arrangements were introduced to give HMRC an easier way of going after the individuals for the relevant tax, and it seems that HMRC currently intend to target individuals employed via loan charge arrangements, whatever rights HMRC may have to collect tax from others.
However, the key point is that this new loan charge legislation is not HMRC's only tool for recovering taxes for taxable income paid to individuals as a loan. It is in addition to the 2011 disguised remuneration legislation which, as noted above, still gives scope for assessment of certain onshore entities (such as staffing companies and end users, depending on exactly how the contract workers are engaged) in the supply chain.
What should you do now?
- Some end-users and staffing companies have been contacted by HMRC and/or affected contract workers in relation this and need to be careful how they respond. If you or your contract workers have been involved in the arrangements, you should take advice on how HMRC can assess end-users, staffing companies and any other onshore intermediaries whose suppliers have been involved in loan arrangements, and what you/they need to do now.
- In case there are any staffing companies out there still considering referrals to loan arrangements, note that on 8 March 2019, HMRC published Spotlight 49 which makes clear that HMRC do not consider certain recent "counsel approved" versions of the loan arrangements to work.
- In addition, we believe that it is possible that the 2017 Criminal Finance Act could, in some cases, be used against supply chains where the loan arrangements have been used. The CFA could apply where there has been deception, which may be deemed to be the case in schemes where promoters/employees have maintained that the loans were "really" repayable (when in fact they knew they would effectively not be repaid). The head of fraud at HMRC now has a dedicated team which is looking at the first files under the CFA (the first relevant tax returns having now been filed). There may be publicity about prosecutions soon and they may possibly attack loan schemes under this. End users and staffing companies need to make sure their CFA defences are in place!
- Note also that the recent Hyrax decision makes it clear that loan schemes like that one are notifiable under the Disclosure of Tax Avoidance Schemes regime. This scheme involved large numbers of contractors and it led to enquiries and assessments being raised against some UK staffing companies and end-users. There are serious penalties for promoters who fail to notify, though the good news is that staffing companies are unlikely to be deemed promoters in most cases.
If you receive any communication from HMRC or contract workers regarding loan schemes, or you become aware that your contract worker population is receiving communications from HMRC regarding a loan scheme, you should seek legal advice.