HMRC Spotlight 46: the GAAR, contractor and EFRBS loan schemes: What you need to know
The GAAR advisory panel have issued two opinions recently on tax schemes used to pay contractors and employees via so-called non-taxable “loans’ instead of normal salary that would have been subject to PAYE. HMRC have highlighted them in Spotlight 46. You can read more about these types of tax avoidance schemes here, here and here. Not surprisingly, the panel have come out against these schemes saying that it was not a reasonable thing to do to enter into such arrangements and carry them out.
What does this mean for me?
In a nutshell, if you are involved in loans to contractors, contrived loan arrangements and EFRBS you now risk one or more of the following:
- A GAAR counteraction notice from HMRC charging the tax you avoided
- An Accelerated Payment Notice requiring you to pay the tax immediately
- A 60% GAAR penalty for arrangements after 14 September 2016 if you do not concede
- Penalties for enablers of defeated avoidance schemes for arrangements on or after 16 November 2017
Did I use one of these schemes?
You will probably know if you did. But if you’re unsure the hallmarks of these schemes involve becoming employed by a trust which hired your services back to your old employer or customer and you got paid a small salary (taxable) and the balance as a loan (claimed by the schemers to be not taxable). The trust invoiced the customer or your old employer for your services and paid you about 82% of what was invoiced. Meanwhile the customer or employer claimed the full amount as a tax deduction in its accounts. The right to demand the repayment of the loan to you was assigned to the trust of which you were a beneficiary so in effect you owed the money to yourself. Were you going to demand that you pay the money back to yourself after you had spent it or invested it in your business? Unlikely, hence HMRC’s name for these loans as disguised remuneration.
What the GAAR Panel Thought
The GAAR advisory panel opinions said that these types of arrangements were artificial and intended to avoid the normal tax consequences of the payment of fees and salary. The arrangements were not a reasonable thing to have done. Indeed since 2010 HMRC have said that they do not work but have been very slow to challenge them effectively. HMRC’s ineptitude and dithering allowed tax schemers backed by QC’s opinions to continue to sell these schemes to innocent entrepreneurs desperate to raise working capital to keep their businesses profitable in the recession and austerity that followed the 2008 banking crisis. These users were not told that what they were doing was contrary to the intention of Parliament and were assured that any HMRC challenge would be defeated. They were told at the time that the schemes were legal and by implication reasonable. Now in 2019 users are finally told that the arrangements were not reasonable and that by April 2019 they are going to have to pay back all the tax avoided plus NIC’s plus interest and in some cases penalties or face the April 2019 loan charge.