Low paid workers who were – or are – paid by an interest free loan, rather than a salary or wage with National Insurance and income tax deducted and therefore haven’t paid tax – are being urged to contact HMRC to discuss their position. Charges are due to be settled on these loans on 5 April 2019 and HMRC is urging those affected to settle and avoid the charge.
The Low Incomes Tax Reform Group (LITRG) is concerned that low paid workers who received payments in the form of loans, while working for ‘umbrella’ companies, are being put off contacting HMRC to start the settlement process.
LITRG has published a Q&A article that deals with the settlement process.
Individuals are encouraged to contact HMRC. Concerns they may have that they may have huge bills, no option of repayment plans, no time to find the funds, that HMRC may decide amounts to pay that are not in their favour – may all be unfounded. The key message is that it is better to have a discussion with HMRC to establish their situation – rather than not.
However, LITRG has become aware that some loan providers appear to be offering workers the chance to repay the loans to avoid the loan charge or to pay a ‘release fee’ to cancel the loan. This is adding another layer of confusion for those involved; either of these may have adverse tax consequences, warns LITRG.
Victoria Todd, head of the LITRG team said: “The loan charge is causing a great deal of debate online and in Parliament. Naturally, strong feelings about the loan charge are voiced by some of those affected and we may well see some legal challenges against the loan charge in the future. Although a legal challenge to the loan charge will not stop HMRC from seeking to settle any avoidance disputes, this is likely to leave those affected confused as to what they should do next.
‘We would encourage all workers potentially affected to read our latest news piece and, if they are considering settling, to contact HMRC without delay. There are a number of options open to HMRC in coming to a settlement sum and in arranging repayment of any money due. However, any settlement contract will only be binding once signed by the person. They can walk away from discussions at any point before then, meaning they are not really disadvantaged by at least talking to HMRC.
‘Some people may be tempted to just face the loan charge in April, but we suggest that they do so only after careful research and with a full understanding of their other options. As the loan charge income will be classed as employment income for the 2018/19 tax year, this research not only needs to be about their tax position but also about their benefits position. Our understanding is that it should not impact tax credits and Universal Credit but it could trigger things like the high income child benefit charge and stop access to Tax-Free Childcare. It could also trigger higher rates of tax, student loan repayments or cause loss of the personal allowance.
“Repaying the loan means workers will need to find the funds to pay the full amount back, although we understand that there may then be some kind of redistribution made to the worker. We are also aware of people receiving offers to have the loan cancelled for a ‘release fee’, which could be a fixed amount plus a percentage of the loan.
“It is not clear to us that either of these options leave workers any better off. We would also urge workers to be extremely cautious about doing either of these things without fully understanding whether there are any further tax consequences and what it might mean with regards to the loan charge.”
To find out if you are affected by loan schemes