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How contractor loans work

In a contractor loans scheme you鈥檙e paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust.

You do not get your payment (or 鈥榣oan鈥�) directly from the company you鈥檙e providing work for because it鈥檚 diverted through a chain of companies, trusts or partnerships.

The companies that promote these schemes will tell you this will save you tax.

Why these schemes could cost you more

Scheme promoters will tell you that the payment is non-taxable because it鈥檚 a loan, and does not count as income.

In reality, you do not pay the loan back, so it鈥檚 no different to normal income and is taxable.

If you鈥檙e using one of these schemes and being paid this way, you鈥檙e highly likely to be avoiding tax. You could end up paying additional taxes, penalties and interest as well as a fee to the promoter.

How to spot schemes that are too good to be true

There are common signs that a scheme is a method of tax avoidance that could end up costing you more than you saved up front.

You鈥檙e told you can take home 80% to 90% of your income

This is highly unlikely to be true. You should get independent advice before signing up to the scheme. Do not rely on the promoter who is selling you the scheme.

You鈥檙e told you do not have to declare the scheme

You must declare contractor loans schemes to HMRC. When they are declared they are then given a scheme reference number. The promoter must pass the reference number to anyone using the scheme.

If you鈥檙e using a contractor loans scheme and you do not show the correct scheme reference number on your tax return, you will be charged additional penalties.

You鈥檙e told the scheme is HMRC approved

HMRC never approves any schemes, so this is always wrong.

You might be told that because a scheme has a scheme reference number, HMRC has 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.

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 9 out of 10 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.

You may have to pay the disputed 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鈥檙e in.

You might also have to pay Inheritance Tax

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

Your mortgage provider and other creditors may be contacted by HMRC

HMRC will ask to see information 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 if you think you鈥檙e in a contractor loans scheme

HMRC strongly advises you to withdraw from the scheme and settle your tax affairs. You鈥檒l avoid the costs of investigation and litigation, and minimise interest and penalty charges on the tax you should have paid.