HM Revenue and Customs (HMRC) is today giving around 16,000 tax avoidance scheme users the opportunity to pay the tax they owe or risk facing bigger tax bills and heavy legal costs.

On average, each of the users of the contractor loan schemes covered by this settlement opportunity owes £11,000 a year in tax.

The schemes, used by a small minority of contractors to avoid paying their fair share, involve complex arrangements with individuals signing a contract of employment with an offshore employer.

The contractor then receives their pay through the offshore company or trust as what is claimed to be a non-taxable loan, rather than income.

These are particularly aggressive schemes and their users will have until January 2015 to take up the settlement opportunity. If they do, they will pay the tax and interest due on the sums they received as loans under the scheme.

If they continue to challenge HMRC in the courts, they risk having to pay additional tax charges and penalties – as well as the costs of litigation if they lose.

Jennie Granger, HMRC Director General for Enforcement and Compliance, said:

“Many people regret ever getting involved with complex aggressive tax avoidance schemes and HMRC is providing an opportunity for contractors to come forward and straighten out their tax affairs.

“This is an important opportunity and we are working hard to encourage users to withdraw from such schemes. We also want to ensure they’ve understood our position. They can choose to continue to litigate for a better outcome but they risk a worse result. HMRC has a strong track record of winning tax avoidance cases in court, with around 80% of decisions in our favour. The costs for users are high, potentially resulting in penalties, charges and significant legal costs for scheme users.”

How do contractor loan schemes work?

Contractor loan schemes are complex arrangements which involve individuals signing a contract of employment with an offshore employer. They then receive their remuneration from contracts in the UK through an offshore company or trust in what are claimed to be non-taxable loans, rather than as income. These are particularly aggressive schemes, used by the 1% of contractors who really do not want to pay their fair share.

This settlement opportunity applies to schemes used before the Disguised Remuneration rules were introduced in April 2011. Around 16,000 users can use the opportunity. However, HMRC will discuss settlement of all scheme use with anyone who comes forward during the settlement opportunity period.