The murky world of loan schemes is getting a whole lot murkier with a new breed of dodgy loan schemes. Contractors need to make sure their umbrella company provider is not actually a loan scheme in disguise. An increasingly number are holding themselves out to be legitimate and compliant umbrella companies where in actual fact they are anything but. Amazingly some operators are even stealthily withholding significant slices of contractors funds back from them for malicious and fraudulent purposes. This is the brutal reality right now but shockingly this behaviour is likely to increase even more. With private sector IR35 reform in April 2020 on the near horizon, PSC contractors are likely to switch to umbrella payroll in increasing numbers.
The frustrating thing with this issue is that it is actually fairly easy to spot Loan Schemes and when they are fraudulently taking funds. As a starting point independent compliance accreditations are a good thing to look out for. For example, the FCSA or Professional Passport . A loan scheme will never in a million years have any of these third party assurances in place. We would like to point out that Exceed are accredited by Professional Passport – just to prove we are not hypocrites.
Do the figures stack up?
Beyond looking for compliance accreditations, there are easy ways to tell if you are dealing with a loan scheme in disguise. Existing customers should check payslips whilst new customers should check sales illustrations. What you are looking for is check once the umbrella’s fee and HMRC liabilities are subtracted, do the figures stack up? If you spot any funds missing then alarm bells should start to sound. Many of the dodgy loan schemes are withholding between 20 to 25% of customers income. Now what actually happens to those withheld funds is an area for debate but there are some likely possibilities. Fraudulent enrichment is a real possibility. Some operators hope that ill-informed contractors simply won’t notice or will accept contrived tax explanations. Many loan operators disappear as quickly as they appear making them ideal vehicles for this criminal activity.
Liability lies with you
Alternatively it seems more likely that the funds are being used to build a financial buffer for the operator to protect themselves when HMRC eventually cottons on. It’s important to make clear, the operator is protecting themselves not you. You could personally be in hot water with HMRC because you used a dodgy scheme. Even is you thought it was a legitimate umbrella. If HMRC takes action to close down the loan scheme, the operator uses the withheld funds to clear their liabilities leaving you the unsuspecting contractor to face your own investigation and debts.
This behaviour is despicable but sadly too many people are being easily hoodwinked into taking compliance assurances at face value. This leaves them extremely vulnerable. It is possible that ignorance could be used as a defence against HMRC action. Although, this will not work if you knew what was happening. Therefore being careless with your tax affairs is not a defence. However being conned into the scheme is not necessarily careless.
There are operators who have been previously caught by HMRC but unbelievably have setup new schemes post the introduction of the infamous Loan Charge. The new evolved schemes are structured with the 20-25% deductions in place. They withhold hard earned money fraudulently to protect the scheme operators in the event of needing to pay HMRC liabilities. The consequences of falling foul of these schemes is potentially devastating. However, it can be avoided with simple checks for real compliance accreditations and for excess statutory deductions or loan figures in payslips.