Despite the Disguised Remuneration (DR) legislation, all the bad press surrounding contractor loan schemes, the anguish and suffering caused to unsuspecting users of these schemes, and the general distaste for these tax avoidance schemes within the contracting industry and tax profession, it appears that some promoters are unmoved.

The latest scheme involving asset transfer arrangements designed to avoid the loan charge is the subject of HMRC’s Spotlight 50.

The cunning scheme

The arrangements put in place are as follows:

  • Contractor is majority/sole shareholder in their own PSC, A Ltd. A Ltd provides services to end client, B Ltd. Both the contractor and A Ltd become partners of an offshore Limited Liability Partnership (LLP).
  • A Ltd invoices B Ltd for services rendered. A Ltd remunerates the contractor by way of a salary at or just above the National Minimum Wage rate.
  • A Ltd then transfers the balance of monies received from B Ltd to the LLP. A Ltd then advises the contractor how much money they can draw on their capital account with the LLP. As the contractor has not contributed any capital to the LLP, the amount that they draw from their capital account is classed as a loan for the purposes of the loan charge.
  • The majority of shares in A Ltd are then sold to a holding company, again based offshore and linked to the scheme promoter, in a bid to extinguish the overdrawn capital accounts. An artificial and fixed value is placed on the shares so as to wipe out the balance of the loan.

HMRC warns that contractors who get involved with this type of scheme may well find themselves locked into further avoidance arrangements for up to 3 years. The Revenue, of course, do not consider that the arrangements produce the desired result of paying off the loan balances and will not reduce or eliminate liability to the loan charge.

Scheme promoters beware

HMRC is pledging to hunt down those who promote or enable tax avoidance and to use the full extent of the department’s armoury. This includes dishing out enablers penalties to anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC, and which is applicable to advice provided or actions taken on or after 16th November 2017. The penalty charged is equal to the amount received or receivable by an enabler for their role in enabling the tax avoidance arrangements.

High risk promoters will also be subjected to the powers under the Promoters of Tax Avoidance Schemes regime.

Damage limitation

Needless to say, HMRC is urging participants in these schemes to get out now and settle with them so as to avoid the costs of investigation, plus minimise interest and penalties.

Anyone thinking about using, or indeed is involved in, one of these schemes should take third party advice and not be swayed by the promoters assurances that their arrangements are watertight and backed by tax counsel’s opinion. In the past, many promoters have disappeared by the time HMRC gets round to investigating a scheme, leaving the participator high and dry.

Should anyone receive emails or promotional material about a tax avoidance scheme they can report this to HMRC in a number of ways - more details can be found here.

Take a look around our Knowledge Hub for more on the loan charge, contractor guides, IR35 news and expert advice.

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