HMRC is now pursuing those who took part in these schemes; attempting to make them pay what the taxman believes they owe despite there being no contest at the time their tax returns were filed.

Particularly controversial is the 2019 Loan Charge, which the team at Sunny Accountants have prepared this special briefing on.

What is the 2019 Loan Charge?

As with all tax avoidance schemes, this can get rather complicated. First we will describe what would trigger a loan charge before we talk about what you might be made to pay if caught out by HRMC.

Let's say that you got paid £5,000 for work that you did for a client during a month. You could then approach a company which ran one of the following – a contractor loan arrangement, a contractor loan scheme, an employer-financed retirement benefit scheme, or an employee benefit trust.

Whichever scheme you chose, you would allow your scheme to take the £5,000 from your client for the scheme company to then “lend” back to you, minus their charge. This arrangement is made on the mutual understanding that the loan would never be paid back. You would pay no tax on this £5,000.

Up until the passage of the Finance Act (No 2) Act 2017, this scheme was not illegal. However, since alterations to the Act changed this, HMRC have been given the ability to delve back 20 years into the financial affairs of contractors who had benefited from such a scheme.

So, it was legal, then it wasn't. And now HMRC have the power to chase contractors for back payments on behaviour which, at the time, was perfectly lawful. And, as ever with HMRC, ignorance is no excuse – despite the unfairness of this measure.

What options are open to contractors hit with the loan charge?

You can approach HMRC to explore the idea of a mutually-agreed settlement. There's more on HMRC's website about that here. Alternatively, you could repay the outstanding amount of the loan with case by the 5th April, 2019 although not all loan providers will allow this.

You can attempt a legal challenge but there are likely to be no solicitors or barristers who would take on a case of this magnitude on a no-win, no-fee basis. Legal bills would likely run into hundreds of thousands of pounds.

The final option is to pay the charge itself however, given that it may date back 20 years, the amount of income tax and National Insurance (and interest) you would need to pay back could be unmanageable, particularly if you used the scheme over a number of years.

Aren't the advisors to blame, not the contractors?

Everyone seems to be pointing the finger of blame at each other. HMRC believes that, even though the schemes at the time were not unlawful, taxpayers should not try to avoid making what it considers their fair and legal contributions to the Exchequer.

The Institute of Chartered Accountants for England and Wales states that “people using DR schemes knew exactly what they were doing and were deliberately avoiding tax. They deserve little or no sympathy.” They do say, however, that HMRC should have acted far sooner.

Many contractors state that they were intentionally misled by the companies which organised and ran their participation in the schemes. The Loan Charge Action Group believe that contractors “never set out to avoid tax…they were simply following professional advice, often as a requirement of their contact employment”.

Even in the event that a consensus builds on who is or was ultimately to blame for this situation, this will not stop HMRC from contractors whom they believe unfairly and unlawfully benefitted from these schemes.

Getting your affairs in order with Sunny Accountants

HMRC are becoming increasingly sophisticated at rooting out those it believes to have underpaid tax with their increasingly sophisticated Connect computer system. Many contractors will, understandably, wait in the hope that HMRC does not find them – this is a bad move, in our opinion.

This is a distressing and upsetting situation and we really appreciate that here at Sunny Accountants. Make sure you contact one of our team to talk through your situation. We deal with HMRC on a daily basis and we know how they work – you are far better off being represented by a tax specialist than trying to represent yourself.

Nottinghamshire's leading contractor accounting specialist

For support and advice on all matters of contractor taxation and IR35, please call us on 01623 559 362 or email [email protected].


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