HMRC announces limited settlement opportunity for 'contractor loan' tax scheme users

Out-Law News | 28 Jul 2014 | 4:10 pm | 2 min. read

The UK's HM Revenue & Customs (HMRC) has announced that, for a limited time, it is offering a settlement opportunity to resolve disputes with 16,000 individuals who used the 'contractor loan scheme' as an attempt to avoid income tax.

The settlement opportunity enables individuals to settle their dispute with HMRC on "the best possible terms", avoiding penalties and further dispute costs.

"In general terms, for a limited time HMRC is offering to tax the amount received as loans at marginal income tax rates and in most cases there will be no claim to PAYE or National Insurance Contributions (NICs)," said tax expert Ray McCann of Pinsent Masons, the law firm behind  "Late payment interest will be added but there will be no penalty."

He said that in some limited situations there could be an exposure to inheritance tax.

The settlement opportunity is available until 9 January 2015. HMRC said that it will continue to take legal action against those who do not settle, which could lead to more income tax or NICs and penalties being payable.

McCann said that that HMRC would not be looking to extend any settlement beyond four years where those earlier periods were otherwise closed.

The settlement opportunity relates to tax years up to 5 April 2011. After this time the law changed with the introduction of the 'disguised remuneration' rules, to counteract such schemes.

The contractor loan scheme is a tax scheme which involved individuals signing an employment contract with an offshore company and receiving a large proportion of their income in the form of a 'loan' from their employer or a trust. Users argued that the loan was not subject to income tax. HMRC said the loan schemes were "particularly aggressive". It said scheme users owed on average £11,000 tax per year.

"Many people regret ever getting involved with complex aggressive tax avoidance schemes and HMRC is providing an opportunity for contractors to come forward and straighten out their tax affairs," said Jennie Granger, HMRC Director General for Enforcement and Compliance.

"It will be important to be clear on what the implications of settling such a scheme is and to ensure that any settlement negotiations run smoothly," said McCann.

HMRC has already successfully challenged a contractor  loan scheme before the tax tribunal in a case involving  IT contractor Phillip Boyle. The Tribunal in that case found that the loans "in reality" represented income. In December 2013, HMRC issued a 'Spotlight' advising contractors against loan schemes and warning that they would be challenging similar arrangements.

New powers which came into force this month enable HMRC to issue a 'follower notice' where it has won a dispute in the courts on a similar scheme against another taxpayer.  A follower notice requires the taxpayer to settle their dispute within 90 days or, if they wish to continue their dispute, to make an accelerated payment of tax and face potential penalties if they are ultimately unsuccessful.  

In 2011 HMRC launched a settlement opportunity for employers who had used employee benefit trusts (EBTs) to minimise the income tax and NIC charge on remuneration to employees and directors and to generate a corporation tax deduction. This month the Upper Tax Tribunal decided that loans from an employee trust to players and employees of Rangers Football Club were not subject to income tax.

Ray McCann said that the use of follower notices and accelerated payment notices against users of employee benefit trust schemes would be "controversial", in the light of the Rangers case.