2017 was a turbulent year for contractors, especially those who work within the public sector and were hit by the introduction of the “off-payroll” reforms in April. Following this, a storm of risky umbrella firms begun luring temporary workers with promises of higher take-home retentions in a bid to sidestep the tax crackdown that occurred with the change of legislation. For contractors that have been caught by IR35 legislation, the temptation to find alternative solutions to recoup lost earnings saw a flurry of non-compliant contractor loan schemes appear and many doctors, social workers and other temporary workers taking an exceptionally high risk by using these.


What are contractor loan schemes exactly?

These disguised remuneration schemes come in a variety of forms such as loans, offshore entitiesannuitiesjob boards and redeemable bonus points. All these providers use various loopholes to avoid paying taxes.

For example, one scheme makes payment to the contractor in two parts. The first part is paid at National Living Wage and recorded as salary, therefore subject to PAYE deduction. The other part is paid to the contractor as an “advanced payment or loan” which isn’t taxed at source. The contractors are then not informed that the “loaned” bonus is taxable and it’ll be them, not the provider, who will be liable for this later.

Contractors are warned to be extra cautious whilst being approached by such contractor loan schemes and raises some points to consider:

  • Too good to be true

Typically, if you are caught within IR35, the retention of your income will be expected to be anywhere between 55%-70%, depending on your pay rate, after all tax and NICs. Therefore, promises of unrealistic retentions over 80-90% are likely to be considered as tax evasion.

  • “All my friends are using this”

The more people who use a tax avoidance scheme then the higher the chance it will be caught under HMRC spotlight. It only takes one irregular tax return for HMRC to begin a review and the investigation could spread throughout the provider’s entire client portfolio.

  • “It’s HMRC Approved”

This simply isn’t true. HMRC will never approve such a scheme, so if you are told this then the sales team are either lying or ignorant. Either way, this is not a good sign and you are being misled. Even if you are told that the scheme has an approved reference number; you can guarantee that the reality will be an HMRC investigation, alongside additional penalties, if this number is not declared on your self-assessment.

  • Counsel opinion

We’ve heard a number of these contractor loan schemes will also advertise they have relevant counsel and quality control opinion but when you try to request documents of this they are “commercially sensitive”, or at best, just opinion. Either way, this evidence will not stand if you are taken to a tribunal.

  • Attractive referral fees

They can promote up to £700 referral bonuses but they can do this because they are making a lot of money out of contractors by keeping their tax and NICs in their pocket. A genuine compliant umbrella company will only charge a small margin (around £20-£30 per week) to process payroll and pay the rest to both you and HMRC. Any sustainable business would not offer an entire year’s fee as a referral bonus.

HMRC is cracking down on these providers and has published spotlights to warn users as well as closing down loopholes with anti-avoidance rules. You can read about more on HMRC Spotlight on Tax Avoidance Scheme. Be warned, these companies tend to fold when investigated and HMRC will approach the user for unpaid tax, NICs and penalties.


What next?

If you are working with these contractor loan schemes or know of colleagues that do, then please contact HMRC at [email protected].

Last, but certainly not least, we would recommend contractors work with a reputable umbrella company who are audited by professional trading bodies within the industry, such as Professional Passport and have affiliations with APSCo or FCSA.