HMRC issues warning over contractor loan tax avoidance schemes

As part of what it describes as a ‘relentless’ effort to crack down on tax avoidance, HMRC has put out two publications highlighting problems with contractor loan schemes and misleading claims from scheme promoters, in a bid to deter taxpayers from any involvement

In its Spotlight 29 document, HMRC says it is seeing a number of avoidance schemes and arrangements being marketed to individuals and businesses that try to reassure users that the schemes and arrangements being offered are legitimate tax planning.

The tax authority says that ‘such schemes are often marketed as wealth management products or dressed up as exciting investment opportunities’, but cautions that they all try to reduce the amount of tax and national insurance contributions (NIC) due on income through ‘contrived or artificial transactions that serve little or no commercial purpose other than to produce a tax advantage’.

HMRC says it has compiled a list of the kinds of claims and statements made by scheme promotors which it says are made without context and are usually misleading.

Examples include claims such as ‘these arrangements fall outside the scope of tax avoidance’; ‘the scheme is not disclosable to HMRC and leading tax counsel (QC) have agreed this’; ‘we have won all previous court cases in relation to these arrangements’; ‘HMRC will write you a few letters and then give up and go away’; and ‘penalties can’t be applied as you have relied on advice of tax counsel’.

HMRC says other statements intended to reassure, but which are false, include: ‘you can earn more and mitigate tax and do so using tax efficient structures fully compliant with the law’; ‘the product is low risk’; and ‘you’re fully insured against any defeat’.

The document points out that a promotor saying ‘the scheme has been disclosed and therefore you can’t be penalised’ does not mean the individual will not have to pay the disputed tax, interest and possibly penalties.

Similarly, saying ‘leading tax counsel have advised that the arrangements are legal and work’ also does not necessarily mean the scheme works. Counsel may be advising the promoter on the basis of assumptions which may not turn out to be correct when the scheme is implemented.

HMRC says the statement ‘HMRC has approved the scheme’ is also misleading, as this may refer simply to the fact that particular scheme has been given a reference number.

The document cautions that ‘if something looks too good to be true, it probably is’, and urges taxpayers to consult HMRC guidance on the pitfalls of tax avoidance schemes.

There is also a separate publication which discusses contractor loan schemes specifically, listing ten reasons why HMRC believes contractors and freelances should steer clear of such arrangements.

Most of these are the result of HMRC’s tougher stance on such schemes, including a recent court decision that such loans are taxable; misunderstandings of the protection of having a Disclosure of Tax Avoidance Scheme (DOTAS) reference number; the fact HMRC will also challenge undisclosed schemes; HMRC’s current 80% success rate at litigation; the risk of receiving an accelerated payment notice; and potential IHT charges if payment is made through a trust.

HMRC also warns that contractors could find using such a scheme damages working relationships and there are challenges to information provided to mortgage companies and other creditors, as well as the risk of facing investigation or prosecution without the support of the promotor.

Information about misleading claims from tax avoidance promoters is here

HMRC’s warning on contractor loan schemes is here.