Loan scheme companies work by paying contractors a small salary and loan them the balance of income (less their usually high fees).

The problem is that as soon as the loan is written off it becomes taxable in full. If the loan is not written off, then the contractor obviously still owe the money to scheme provider – this money can be called in at any time and at any point in the future.

A number of contractors signed up to this type of scheme in good faith after promises that, when they left the loan would be written off. The problem is, now these people are receiving letters from the scheme provider reclaiming the debt.

There is also the risk of being hit twice for the debt. The ‘loan’ is a benefit in kind (BIK) and if it’s not declared on a tax return as income, contractors also potentially face a huge tax bill and fine, on top of repaying back the original loan.

Contractors that have got caught up in these schemes are flocking to a popular contractor forum expressing their worries. One contractor wrote “Please add one more frustrated, sick and naive con to the list. I had a letter arrive Thursday and it knocked me sick. Stressed about it all day Friday only to find another when I go home. Not the most settled of weekends.”

Has a contractor asked you about one of these companies or has a loan scheme company approached you negotiating referral fees?

These schemes are extremely misleading and anyone using one will end up worse off in one way or another. If you are considering recommending one of these schemes - our advice is don’t do it. You don’t want angry contractors contacting you asking why you recommended a company that has landed them in so much trouble!

If you have any questions after reading this page or would just like to make a general enquiry, please contact a member of our team on 01206 713680.

Read our BN66 page to find out more about offshore schemes and what exactly is an Umbrella Company dispensation?