The Loan Charge was launched in 2019 following the Finance Act (2016), in a bid to address tax losses for the Government coffers. These changes largely affected the self-employed, those who have had to deal with IR35 changes and umbrella companies who operated through a variety of “disguised remuneration” schemes.
The changes created a furore and in December 2019, an independent Loan Charge Review was conducted by Sir Amyas Morse, whose concerns were raised in two areas, the first being whether the Loan Charge “deviates too far from the usual operation of the tax system and therefore undermines taxpayers’ rights.”
The second issue being the “distress and hardship amongst those affected.”
Amyas provided the following summary: “I have considered these questions carefully. If asked, ‘was some form of policy like the Loan Charge necessary and in the public interest?’, I would say ‘yes’. It is clear that most people would agree that everyone should pay their fair share of tax. However, the evidence provided to the Review prompts serious questions about how proportionate the Loan Charge was in terms of its design and effect on individuals. The recommendations in this report are designed to address these questions.”
Amyas continued by examining how the Loan Charge, in his view, was warranted: “The Loan Charge therefore emerged in 2016 out of a desire to shut down the use of loan schemes, for reasons of fairness to other taxpayers, as well as value for money, practicality, and to collect revenue for public services.
“This followed over 65,000 instances of loan scheme usage from April 2011-March 2016, and a decline in the number of schemes (and taxpayer usage of them) being disclosed to HMRC. In spite of the law being clear, HMRC were therefore not always able to identify the relevant users or efficiently collect the tax that was due. This delay effectively delivered an unjustified advantage to taxpayers participating in loan schemes. Non-disclosure meant that HMRC were unable to use recently established powers – such as Accelerated Payment Notices (APNs) – to collect the tax quickly that was due.
“For those reasons, I support the essential purpose of the Loan Charge.”
Following the review, the Government (through HMRC and HM treasury) issued updated guidance on disguised remuneration, with the following key changes being made to the Loan Charge:
- The Loan Charge will apply only to outstanding loans made on, or after, 9 December 2010
- The Loan Charge will not apply to outstanding loans made in any tax years before 6 April 2016 where a reasonable disclosure of the use of the tax avoidance scheme was made to HMRC and HMRC did not take action (for example, opening an enquiry into an Income Tax return)
- The option for individuals to elect to spread the amount of their outstanding loan balance (as at 5 April 2019, recalculated in line with the above changes) evenly across 3 tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021 – the option was added to give greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of tax
- HMRC will refund certain voluntary payments (known as ‘voluntary restitution’) already made to prevent the Loan Charge arising and included in a settlement agreement reached since March 2016 (when the Loan Charge was announced) for any tax years where: the Loan Charge no longer applies (loans made before 9 December 2010) or where loans were made before 6 April 2016, and a reasonable disclosure of the use of the tax avoidance scheme use was made to HMRC and HMRC did not take action (for example, opening an enquiry into an Income Tax return)
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Additional changes were also made that provided affected customers with “additional flexibility over the way they pay”.
Despite the review, the Loan Charge has proven to be extremely controversial, with the review acknowledging its introduction led to difficulties for affected workers, with a low “but still considerable” number of cases referencing suicidal thoughts.
While this is a complicated issue, Keith Gordon, a Barrister at Temple tax chambers, put the situation into a digestible perspective: “Contractors being effectively in business on their own account are required to carry out the admin side of running a business as well as the day-to-day business activities. Many have the skills for the latter but not the former. They are therefore dependent on advisers and outsourced service providers for the former.
“On top of that, end users (clients) do not like engaging contractors directly because of risks of employment law and tax law. However, if the contractor operates through a limited company there is the constant risk of an HMRC challenge under IR35 (which would represent yet a further administrative hassle for the contractor).
“Consequently, many contractors provide their services through umbrella companies (and similar), which effectively takes a fee for providing all the admin back-up necessary for a contractor.
“Unfortunately, some umbrellas saw a way to make an extra bob or two. They took arrangements which have been used since the late 1980s by wealthy individuals and implemented them on an industrial scale. The schemes were previously devised as a way of getting wealthy entrepreneurs to extract a bonus from their company in a tax efficient way – i.e. not as an outright bonus but in the form of a loan which would be repayable on death (often with interest rolled up as well so as to avoid any lifetime tax difficulties).”
Keith argued these umbrella companies decided to roll out similar arrangements so that the day-to-day earnings of contractors would be paid in the form of similar types of loans.
He continued: “The umbrellas used these tax savings for their own purposes. Most of them were effectively swallowed up as fees, but it is possible that some umbrellas used these savings so as to undercut the opposition when providing contractors. Typically, contractors were charged a flat 18 percent fee, which was only one-two percent less than the corporation tax rates that they would have paid had they used a limited company (and without the IR35 risk looming over them). Many contractors were wholly unaware of what they were signing up to.”
Keith highlighted that a turning point arrived in 2017 as the Supreme Court agreed with HMRC that a tax avoidance scheme used by Rangers Football Club, who tried to pay staff through an employee benefit trust, did not work.
The court detailed that Rangers Football Club should have deducted income tax and NI contributions from the payments made into the scheme.
This case has been used by the Government to defend the introduction of the Loan Charge.
Despite this, Keith argued it proved to be a “pyrrhic” victory for the Government, as he continued: “The Loan Charge looks at the loan as still outstanding on April 5 2019 and treats that as income of the 2018/19 tax year. (This has since been relaxed slightly following Morse.) But in its basic form, the contractor is effectively obliged to pay tax on a notional payment of £X yet still have the obligation to repay that £X at some date.
“Thus in one fell swoop the tax liability has effectively been transferred from the defaulting employer to the innocent employee.
“It is my belief, however, that HMRC did not really expect many people to pay the Loan Charge. This was because one could contract out of it by settling all the previous years’ tax debts as asserted by HMRC in respect of the original loan advances. In other words, if the taxpayer agrees to HMRC’s demands for those earlier years (notwithstanding the full defences available to him/her) HMRC would exclude the taxpayer from the Loan Charge.
“What I do not think HMRC appreciated is that these contractors were not sitting on large cash balances allowing them to pay off HMRC at will. These sums were the earnings of ordinary individuals, not the super wealthy and had long been spent. It is true that (as we know with the benefit of hindsight) the receipts had not been taxed in full, but the contractors were not to know about this.”
The Loan Charge continues to stir emotional and dramatic responses online, in certain tax organisations and even in the house of lords.
However, Keith concluded by providing a succinct summary of what’s led up to this point, and what could be done to amend the issues raised:
- The Loan Charge was originally due to operate for loans made between April 6 1999 and April 5 2019 (as still outstanding on April 5 2019.)
- After the Morse review, it now operates for loans made between December 9 2010 and April 5 2019 (as still outstanding on April 5 2019.)
- To operate prospectively, that 9 December 2010 should change again to either: March 16 2016 when the Loan Charge was first announced or any later date such as April 6 2016 (i.e. the beginning of the tax year immediately after the first announcement of the Loan Charge) or November 2017 when the Loan Charge was formally enacted by Parliament and given Royal Assent.
“All that would be needed would be:
- A slight tweak to the relevant legislation changing December 9 2010 to the new date selected and
- Depending on the new date adopted, perhaps some consequential tidying up to the legislation.
“It could happen by virtue of any Act of Parliament (ideally as part of the annual Finance Act process). Therefore, the theory is easy. The difficulty is doing so without Government support and without a huge rebellion from Tory backbenchers.
“Last year, amendments were proposed which did not quite go as far as this (simply because there are procedural difficulties in making changes in Finance Bills unless the government is supportive) and the government countered those proposals with a mass misinformation campaign so as to put off backbenchers.”
Keith is also not the only expert to call for change as Baroness Kramer, a Vice-Chair of the Loan Charge APPG, in speaking exclusively with Express.co.uk detailed the following: “The Loan Charge has not gone away as an issue, indeed it is about to really hit home as HMRC demand and enforce huge retrospective bills for unproven tax that people simply cannot pay. If the Government sticks to this draconian approach, some people will lose their homes, there will be bankruptcies and there is a real risk of family and mental breakdown.
“It’s time for the Government to show some commonsense, as well as some compassion. It makes no sense at all to demand sums that people can’t possibly pay, pushing many to bankruptcy when that means they won’t be able to work and pay any taxes. Instead, it’s time to resolve this issue by allowing people to pay 10 percent, as proposed by the Loan Charge APPG, giving people the chance to pay this according to their situation and income. The Loan Charge Scandal is a stain on this Government and the integrity of our tax system, and it’s time the Chancellor resolved it in a way that allows HMRC to collect something, but without ruining thousands of lives”.
In response to these issues and the claims made, a HMRC spokesperson said: “The Loan Charge was introduced to ensure those who used disguised remuneration tax avoidance schemes paid their fair share of income tax and national insurance contributions.
“We must uphold the fundamental principle that individuals are responsible for their own tax affairs and it is right that we continue to tackle these types of schemes as they deprive public services of vital funding.
“Sir Amyas Morse’ led an independent review into the policy in 2019 and concluded that it was right that the loan charge remain in force. The Government recognised concerns around its impact, which is why it accepted the vast majority of recommendations, leading to significant changes in legislation.
“We will not force anyone to sell their main home to pay their disguised remuneration debt or the Loan Charge. We encourage any customers who are worried about paying their loan charge liability to please contact us and we will be able to help them. We have been clear that we will work with customers to enter manageable payment plans to spread their tax liability and ensure that they are affordable”.