Tens of thousands of IT contractors have been hit with life-changing tax bills relating to tasks they labored on over a decade in the past after enrolling in remuneration schemes that noticed them paid for the work they did within the type of non-taxable loans, somewhat than a traditional wage.
These loan-based remuneration schemes had been usually run by offshore worker advantages trusts (EBTs), and had been usually erroneously marketed as being an HM Revenue & Customs (HMRC)-compliant means for contractors to bolster their take-home pay, with contractors usually suggested to be part of such schemes by revered tax advisers.
In some situations, contractors had been instructed they might be unable to work for sure organisations except they agreed to be paid in loans, too.
In current years, nonetheless, scheme members have discovered themselves in HMRC’s crosshairs, thanks to the introduction of a chunk of retroactive laws – often known as the Loan Charge – that’s designed to assist the federal government recoup the tax it claims members averted paying between December 2010 and April 2019.
The people now being chased for backdated tax funds by HMRC declare they’re the victims of mis-selling, given how these schemes had been beforehand marketed to them as protected and compliant to use, and the situation has seen more than 200 MPs from various parties come out in support of their plight.
In the years because the coverage was launched, and particulars of the toll it’s taking over these in its scope have began to emerge, there have been a series of legal actions attempted to overturn the policy.
There have also been calls from MPs for HMRC to cease doggedly pursuing the people concerned, and begin taking punitive measures towards the employers, companies and promotors who suggested folks to be part of these schemes within the first place.
At the time of writing, although, the coverage stays in place, and there are few indicators from the federal government that it has any intention of revising its contents or the way it works.
The situation has drawn parallels with the Post Office Horizon IT scandal, given the folks caught in scope of the Loan Charge are extensively thought-about to be victims of mis-selling by accountants and trusted tax advisors who marketed these loan-based remuneration schemes as HMRC-approved.
Sammy Wilson, an MP representing the Democratic Unionist Party (DUP), drew comparisons between the victims of the Post Office scandal and the people affected by the Loan Charge during a January 2024 Business Committee Back Bench debate in the House of Commons.
As was the case with the Post Office scandal victims, the Loan Charge story equally entails a bunch of people that had been “appearing in good religion being prosecuted and pursued” when the individuals who “completely knew what they had been doing are getting away scot-free”, stated Wilson.
In the case of the Loan Charge, the events chargeable for advertising and marketing and selling these loan-based remuneration schemes aren’t being pursued in the identical approach because the people who participated in them, which he described as mistaken.
“HMRC are going after those that they regard as simple targets,” stated Wilson. “The promoters of those schemes – not one penny [has been demanded from them].
“Despite the promoters [making] a whole lot of hundreds of thousands of kilos of those schemes, [they] have mis-sold the schemes, [and] have disappeared when there may be any try to get after them,” he added. “Those promoters aren’t being pursued … and but people are being harassed – harassed to the purpose that lots of them have taken their very own lives.”
What is the Loan Charge coverage and why was it launched?
The Loan Charge coverage was launched as a part of an ongoing anti-tax avoidance marketing campaign by HMRC, designed to counter the surge within the variety of loan-based remuneration schemes in operation.
The coverage was put ahead by HM Treasury in the course of the 2017 Budget as technique of recouping billions of kilos in unpaid taxes the UK authorities claimed contractors averted paying by opting to be paid within the type of non-taxable loans somewhat than obtain a traditional wage.
The coverage phrases initially said that any contractor who participated in a loan-based remuneration scheme between 6 April 1999 and 5 April 2019 can be in-scope of the coverage, and can be anticipated to pay again any and all tax they averted whereas enrolled in these schemes.
The complete quantities of unpaid tax HMRC stated they owed are what’s referred to because the “Loan Charge”.
An independent review of the policy, published in December 2019, concluded the timeframe the coverage covers must be shortened by 11 years, in order that solely people who enrolled in schemes after 9 December 2010 can be included.
It is estimated this variation resulted in round 10,000 folks falling out of scope of the Loan Charge coverage.
Why is the coverage thought-about “controversial”?
Much of the controversy surrounding the Loan Charge relates to the retroactive nature of the coverage, with critics usually taking concern with the very fact it successfully introduces a retrospective tax on one thing – on this case, a mortgage – that was beforehand technically thought-about to be non-taxable.
The timeframe the coverage covers additionally means the ultimate quantities of unpaid tax that people can find yourself owing can find yourself being life-changing, with lots of these affected liable to monetary wreck or dealing with chapter because of this.
There can also be the truth that most of the people who participated in these schemes acquired assurances from trusted tax advisors and accountants that receiving cost for the work they did on this approach was permissible and acceptable within the eyes of HMRC.
How a lot cash does HMRC count on to make from the Loan Charge?
When the coverage was first launched, HMRC estimated that implementing the Loan Charge would enable it to recoup £3.2bn in beforehand unpaid tax over the course of 5 years, however that determine was later revised up to £3.4bn.
However, the publication of the impartial evaluation into the coverage, which resulted in a number of tweaks being made to the way it works, is estimated to have decreased the coverage’s general complete tax take by £620m.
How many individuals are affected by the Loan Charge coverage?
HMRC suggests there are round 50,000 people affected by the Loan Charge coverage, though volunteer-led non-profit the Loan Charge Action Group (LCAG) has beforehand instructed Computer Weekly it thinks the variety of folks affected is much, far greater.
Those affected embody a disproportionate variety of IT contractors, in addition to NHS employees, public sector company employees, academics and people working within the oil and fuel sector.
Why did folks use loan-based disguised remuneration schemes?
While the concept of loan-based remuneration schemes pre-dates the onset of the IR35 regulations, the variety of these schemes in operation markedly elevated within the wake of HMRC introducing these revamped tax avoidance guidelines in 2000.
The IR35 laws had been launched as a part of a disguised employment push by the federal government that will see contractors having their engagements categorised as being both inside or exterior IR35 based mostly on the form of work they do and the way it’s carried out.
Contractors that are determined to be working inside IR35 are considered to be staff for tax functions, which means they’re liable to pay the identical employment taxes and nationwide insurance coverage contributions (NICs) as a salaried worker, however aren’t entitled to employment advantages akin to paid sick depart or pension contributions.
In many instances, contractors had been supplied the chance to side-step the IR35 laws totally by opting to shut down their restricted firm and sign on to become the employee of an umbrella company instead.
Some of those umbrella corporations operated in a non-compliant method by promising contractors they might improve their take-home pay by agreeing to be paid in non-taxable loans issued by EBTs that had been marketed as HMRC-compliant.
HMRC, nonetheless, has all the time maintained that it has by no means permitted using a loan-based remuneration scheme, and has additionally been of the view that such schemes don’t work.
In addition to that, it has additionally been repeatedly claimed by lots of these affected by the Loan Charge coverage that they had been unwittingly enrolled in these schemes by umbrella corporations that promised them “too-good-to-be-true” quantities of take-home pay with out disclosing they might be paid in loans.
What affect has the Loan Charge coverage had on these affected?
While HMRC has repeatedly said that nobody in-scope of the Loan Charge will likely be compelled to promote their fundamental residence to cowl the quantities it claims they owe in unpaid tax, Computer Weekly has heard anecdotal stories from IT contractors who’ve carried out precisely that.
HMRC has beforehand said that it has no intention to make the people in-scope of the Loan Charge coverage bankrupt, and that insolvency will solely be thought-about as a final resort if the individual concerned is actively avoiding paying what they owe or are liable to accruing additional debt.
Even so, members of the Loan Charge APPG have repeatedly spoken out in regards to the toll the coverage is taking over the well being and well-being of these affected.
There have additionally been 10 suicides linked to the Loan Charge to-date, as confirmed by HMRC, in a letter signed by its CEO, Jim Harra, in January 2023.
The missive states that HMRC has had trigger to refer itself to the Independent Office for Police Conduct on 10 events “the place a buyer has sadly taken their life and had used a disguised remuneration scheme”.
Do the folks affected by the mortgage cost have to repay their loans?
This query is essential to understanding the Loan Charge coverage. Loans are usually not thought-about to be a type of taxable revenue, however – in accordance to HMRC – the recipients of those loans ought to pay tax on them as a result of they had been by no means supposed to be repaid.
Furthermore, many contractors who participated in these schemes were of the understanding they would never be asked to repay the loans they received.
But – as extensively documented by Computer Weekly – a number of makes an attempt have been made in recent times by completely different events to recall the loans contractors acquired, which means – as well as to HMRC – they’ve additionally been requested to repay these loans in full, plus curiosity.
In situations akin to this, HMRC has restated that any person that repays a mortgage they acquired in the course of the timeframe coated by Loan Charge coverage will nonetheless need to repay the tax it claims they nonetheless owe.
This is an consequence few, if any, mortgage scheme members have ever budgeted for, including additional stress to their funds.
How can the Loan Charge concern be resolved?
Some people caught within the coverage’s scope have sought settlements with HMRC to carry the matter to a detailed for them, though there are additionally anecdotal stories of people that went down this route after which acquired additional cost calls for from HMRC afterwards.
There have been quite a few authorized challenges tried to overturn the coverage, in addition to requests made to HMRC to think about letting these unable to pay off the full amounts owed pay a reduced settlement figure, so the federal government tax assortment company will get some cash somewhat than none.
MPs have also repeatedly called on the government to do extra to deal with the folks chargeable for advertising and marketing these schemes, to stop new schemes from rising. There are additional calls to additionally unfold the tax burden on to the promoters, companies and employers that inspired people to be part of these schemes.
During the Autumn Budget 2024, the federal government confirmed there can be a second impartial evaluation of the coverage to carry the matter to a detailed for all these affected.
This was on the again of representations made to Treasury Minister James Murray throughout a gathering facilitated by the APPG in August 2024, the place varied people in-scope of the coverage outlined the toll the Loan Charge was taking over their well being, well-being and their funds.
At the time of writing, HM Treasury is but to verify the scope of the evaluation and who will likely be tasked with overseeing it.
In the meantime, Computer Weekly has learned that HMRC is offering to pause the settlement activity of anyone caught by the Loan Charge until the review has concluded.
