The tax man is reminding IT contractors that any money they are paid from trusts or umbrella companies must be taxed like any other income to borrow money.
Contractors caught using the schemes face a tax investigation and possible charges for fraud if they have wrongly declared their income as borrowings.
“If the income on your tax return is lower than the income on your mortgage application, HMRC may charge you penalties and interest as well as the additional tax you should have paid,” says HMRC.
HM Revenue and Customs (HMRC) argues that contractor loan scheme promoters may suggest the loans are not income and do not attract income tax, but as they are never repaid they are the same as any other income and should be declared and taxed appropriately.
HMRC is also urging contractors to make sure they declare their full earnings and revealed some schemes face a legal challenge from the tax authority. Contractors accused of avoiding tax and national insurance are already receiving demands for unpaid tax.
Contractors shielding income in a trust may also find their estates are subject to inheritance tax claims.
The contractor loans guidance follows changes in Budget 2016 relating to disguised remuneration issues.
HMRC has circulated a policy paper about disguised indicating retrospective action may be taken against contractors and freelancers who have avoided tax with loan schemes without taking up past settlement opportunities.
“The government is committed to ensuring people who have used these schemes in the past aren’t allowed to get away with it. To meet this objective, the government will introduce legislation to put beyond doubt that all loans or debts from a disguised remuneration scheme will be taxed as earnings if they haven’t already been fully taxed or repaid on or before 5 April 2019,” said HMRC.