How it works

In a contractor loans scheme you receive your salary in the form of a loan from a trust or company, sometimes referred to as a remuneration trust. You do not receive your payment (or ‘loan’) directly from the company you’re providing work for because it is diverted through a chain of companies, trusts or partnerships.

The companies that promote these schemes will tell you this will save you tax, thus increasing your take home pay.

All locum workers and contractors who normally get work as an agency or temporary worker could be offered a contractor loans scheme. HMRC has outlined why you should be vigilante and avoid such disguised remuneration schemes… or pay the penalty.

Top 10 reasons you should avoid contractor loan schemes

1. ‘You will receive 90% of your income,’ they say

Scheme operators will claim you can take home 80% to 90% of your income however, HMRC says this is highly unlikely to be true and warns against relying on the promoter who is selling you the scheme. You should get independent advice before signing up to the scheme, adds HMRC.

2. ‘It’s non-taxable,’ they say

Scheme promoters will tell you that the payment is non-taxable because it is a loan, and doesn’t count as income. However, as you don’t pay the loan back it is no different to normal income and is taxable.

3. ‘The scheme is HMRC approved,’ they say

The companies running these schemes claim the scheme is HMRC approved. However HMRC states that it never approves any schemes, so this is always wrong. The scheme may have a scheme reference number, but that does not mean HMRC have approved it. The reality is that the reference number identifies you as the user of a scheme, and you can expect HMRC to investigate it.

4. Declared schemes

Contractor loans schemes must be declared to HM Revenue and Customs (HMRC). When they are declared they are then given a scheme reference number, as outlined above. The promoter must pass the reference number to anyone using the scheme. If you are using a contractor loans scheme and you don’t show the correct scheme reference number on your tax return, you will be charged additional penalties.

5. Undisclosed schemes

HMRC challenges undisclosed schemes too. So even if you are using a scheme which hasn’t been declared, you may still need to pay additional tax, penalties and interest if you’ve used it.

6. The cost

If you have been using a contractor loans scheme and being paid this way, you are highly likely to be avoiding tax and therefore liable for paying additional taxes, penalties and interest as well as a fee to the promoter.

7. What could happen if you use one of these schemes?

HMRC challenges contractor loans schemes. Where scheme users push their case to litigation, HMRC wins around 80% of all avoidance cases that end up in court. The scheme promoter may not be around to support you once HMRC starts investigating your tax affairs. You could have to deal with complex investigations on your own, the HMRC warns.

8. Tax up front

If HMRC sends you an accelerated payment notice, you will have to pay the disputed tax up front while HMRC investigates the contractor loans scheme you’re in.

9. Inheritance Tax

If your loan was paid through a trust, you may have to pay Inheritance Tax now or in the future.

10. Mortgage

HMRC may contact your mortgage provider and other creditors. HMRC will ask to see information that you provided to your mortgage provider and other creditors. If the income on your tax return is lower than the income on your mortgage application, HMRC may charge you penalties and interest as well as the additional tax you should have paid.
What to do: HMRC strongly advises all locum workers to withdraw from the scheme and settle your tax affairs. You’ll avoid the costs of investigation and litigation, and minimise interest and penalty charges on the tax you should have paid.

HMRC: Contractor loan schemes
https://www.gov.uk/guidance/contractor-tax-loan-schemes-can-cost-you-more