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Posted 12th October 2021

What is the contractor Loan Charge?

Many contractors will have seen news on the Loan Charge over the past few years, and many others are likely to have been impacted by charge.

It has been a topic of great debate and one that has been plagued by controversy, but what exactly is it? Below we take a look at the contractor Loan Charge and how it is impacting the industry.

The Loan Charge – what is it & why has it been introduced?

Introduced in 2019, the Loan Charge was first mentioned in the 2016 budget. Its aim is to allow HMRC to recuperate any unpaid tax from schemes that involved a loan payment to a contractor, which has now been deemed as tax avoidance (also known as disguised remuneration).

These schemes often saw contractors paid via loans instead of a salary. They were typically interest-free and non-repayable, meaning that they avoided income tax and national insurance contributions.

The Loan Charge will include the value of all profits that had been paid via a loan or credit anytime between 6th April 1999 to 5th April 2019. As you can imagine, this could amount to thousands upon thousands of pounds for contractors, many of whom will not have knowingly entered into these schemes as a way to avoid tax.

Often, contractors would enter these disguised remuneration schemes under the advice of a third party or were encouraged to join without understanding the ramifications of entering into such a scheme.

As a result of this, the Loan Charge has come under fire from industry representatives and bodies, due to the fact that it has forced many contractors to the brink of bankruptcy. In fact, during a recent meeting, HMRC failed to convince the Lords Economic Affairs Committee of the legal justification of this retrospective tax. Furthermore, there has been significant criticism on the failure to crack down on corrupt umbrella companies that are still promoting these schemes.

How to avoid working with a non-compliant umbrella company

Here at Exchequer Solutions, we are dedicated to providing a compliant, quality service. Therefore, we continually do all we can to educate contractors on how to spot a dodgy umbrella company, to ensure that they aren’t drawn in by grand promises. These promises will often include:

  • Paying less tax
  • Payment in the form of loans or credit (therefore isn’t taxable)
  • Receipt of small payment with NI and tax deductions, followed by larger payment

If you want to ensure you work with a compliant umbrella company, speak to the Exchequer Solutions team today!

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