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The Loan Charge scandal explained: Everything you need to know

Tens of thousands of IT contractors have been saddled with life-changing tax bills as a result of a controversial, retroactive government policy – and the fall-out from its introduction has been likened to the Post Office IT scandal

Tens of thousands of IT contractors have been hit with life-changing tax bills relating to projects they worked on over a decade ago after enrolling in remuneration schemes that saw them paid for the work they did in the form of non-taxable loans, rather than a conventional salary.

These loan-based remuneration schemes were typically run by offshore employee benefits trusts (EBTs), and were often erroneously marketed as being an HM Revenue & Customs (HMRC)-compliant means for contractors to bolster their take-home pay, with contractors often advised to join such schemes by respected tax advisers. 

In some instances, contractors were told they would be unable to work for certain organisations unless they agreed to be paid in loans, too.

In recent years, however, scheme participants have found themselves in HMRC’s crosshairs, thanks to the introduction of a piece of retroactive legislation – known as the Loan Charge – that is designed to help the government recoup the tax it claims participants avoided paying between December 2010 and April 2019.

The individuals now being chased for backdated tax payments by HMRC claim they are the victims of mis-selling, given how these schemes were previously marketed to them as safe 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 since the policy was introduced, and details of the toll it is taking on those in its scope have started 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 stop doggedly pursuing the individuals involved, and start taking punitive measures against the employers, agencies and promotors who advised people to join these schemes in the first place.

At the time of writing, though, the policy remains in place, and there are few signs from the government that it has any intention of revising its contents or how it works.

The situation has drawn parallels with the Post Office Horizon IT scandal, given the people caught in scope of the Loan Charge are widely considered 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 individuals 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 similarly involves a group of people who were “acting in good faith being prosecuted and pursued” when the people who “absolutely knew what they were doing are getting away scot-free”, said Wilson.

In the case of the Loan Charge, the parties responsible for marketing and promoting these loan-based remuneration schemes are not being pursued in the same way as the individuals who participated in them, which he described as wrong.

“HMRC are going after those who they regard as easy targets,” said Wilson. “The promoters of these schemes – not one penny [has been demanded from them].

“Despite the promoters [making] hundreds of millions of pounds of these schemes, [they] have mis-sold the schemes, [and] have disappeared when there is any attempt to get after them,” he added. “Those promoters are not being pursued … and yet individuals are being harassed – harassed to the point that many of them have taken their own lives.”

What is the Loan Charge policy and why was it introduced?

The Loan Charge policy was introduced as part of an ongoing anti-tax avoidance campaign by HMRC, designed to counter the surge in the number of loan-based remuneration schemes in operation.

The policy was put forward by HM Treasury during the 2017 Budget as means of recouping billions of pounds in unpaid taxes the UK government claimed contractors avoided paying by opting to be paid in the form of non-taxable loans rather than receive a conventional salary.

The policy terms initially stated that any contractor who participated in a loan-based remuneration scheme between 6 April 1999 and 5 April 2019 would be in-scope of the policy, and would be expected to pay back any and all tax they avoided while enrolled in these schemes.

The total amounts of unpaid tax HMRC said they owed are what is referred to as the “Loan Charge”.

An independent review of the policy, published in December 2019, concluded the timeframe the policy covers should be shortened by 11 years, so that only individuals who enrolled in schemes after 9 December 2010 would be included.

It is estimated this change resulted in around 10,000 people falling out of scope of the Loan Charge policy.

Why is the policy considered “controversial”?

Much of the controversy surrounding the Loan Charge relates to the retroactive nature of the policy, with critics often taking issue with the fact it effectively introduces a retrospective tax on something – in this case, a loan – that was previously technically considered to be non-taxable.

The timeframe the policy covers also means the final amounts of unpaid tax that individuals can end up owing can end up being life-changing, with many of those affected at risk of financial ruin or facing bankruptcy as a result.

There is also the fact that many of the individuals who participated in these schemes received assurances from trusted tax advisors and accountants that receiving payment for the work they did in this way was permissible and acceptable in the eyes of HMRC.

How much money does HMRC expect to make from the Loan Charge?

When the policy was first introduced, HMRC estimated that implementing the Loan Charge would allow it to recoup £3.2bn in previously unpaid tax over the course of five years, but that figure was later revised up to £3.4bn.  

However, the publication of the independent review into the policy, which resulted in several tweaks being made to how it works, is estimated to have reduced the policy’s overall total tax take by £620m.

How many people are affected by the Loan Charge policy?

HMRC suggests there are around 50,000 individuals affected by the Loan Charge policy, although volunteer-led non-profit the Loan Charge Action Group (LCAG) has previously told Computer Weekly it thinks the number of people affected is far, far higher.

Those affected include a disproportionate number of IT contractors, as well as NHS workers, public sector agency staff, teachers and individuals working in the oil and gas sector.

Why did people use loan-based disguised remuneration schemes?

While the concept of loan-based remuneration schemes pre-dates the onset of the IR35 regulations, the number of these schemes in operation markedly increased in the wake of HMRC introducing these revamped tax avoidance rules in 2000.

The IR35 regulations were introduced as part of a disguised employment push by the government that would see contractors having their engagements classified as being either inside or outside IR35 based on the kind of work they do and how it is carried out.

Contractors that are determined to be working inside IR35 are considered to be employees for tax purposes, meaning they are liable to pay the same employment taxes and national insurance contributions (NICs) as a salaried employee, but are not entitled to employment benefits such as paid sick leave or pension contributions. 

In many cases, contractors were offered the opportunity to side-step the IR35 regulations entirely by opting to close down their limited company and sign on to become the employee of an umbrella company instead.

Some of these umbrella companies operated in a non-compliant manner by promising contractors they could increase their take-home pay by agreeing to be paid in non-taxable loans issued by EBTs that were marketed as HMRC-compliant.

HMRC, however, has always maintained that it has never approved the use of a loan-based remuneration scheme, and has also been of the view that such schemes do not work.   

In addition to that, it has also been repeatedly claimed by many of those affected by the Loan Charge policy that they were unwittingly enrolled in these schemes by umbrella companies that promised them “too-good-to-be-true” amounts of take-home pay without disclosing they would be paid in loans.

What impact has the Loan Charge policy had on those affected?

While HMRC has repeatedly stated that no one in-scope of the Loan Charge will be forced to sell their main home to cover the amounts it claims they owe in unpaid tax, Computer Weekly has heard anecdotal reports from IT contractors who have done exactly that.

HMRC has previously stated that it has no intention to make the individuals in-scope of the Loan Charge policy bankrupt, and that insolvency will only be considered as a last resort if the person involved is actively avoiding paying what they owe or are at risk of accruing further debt.

Even so, members of the Loan Charge APPG have repeatedly spoken out about the toll the policy is taking on the health and well-being of those affected.

There have also 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 cause to refer itself to the Independent Office for Police Conduct on 10 occasions “where a customer has sadly taken their life and had used a disguised remuneration scheme”. 

Do the people affected by the loan charge have to repay their loans?

This question is key to understanding the Loan Charge policy. Loans are typically not considered to be a form of taxable income, but – according to HMRC – the recipients of these loans should pay tax on them because they were never intended 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 – several attempts have been made in recent years by different parties to recall the loans contractors received, meaning – in addition to HMRC – they have also been asked to repay these loans in full, plus interest.

In instances such as this, HMRC has restated that any individual that repays a loan they received during the timeframe covered by Loan Charge policy will still need to repay the tax it claims they still owe.

This is an outcome few, if any, loan scheme participants have ever budgeted for, adding further pressure to their finances.   

How can the Loan Charge issue be resolved? 

Some individuals caught in the policy’s scope have sought settlements with HMRC to bring the matter to a close for them, although there are also anecdotal reports of people who went down this route and then received further payment demands from HMRC afterwards.

There have been numerous legal challenges attempted to overturn the policy, as well as requests made to HMRC to consider letting those unable to pay off the full amounts owed pay a reduced settlement figure, so the government tax collection agency gets some money rather than none.

MPs have also repeatedly called on the government to do more to tackle the people responsible for marketing these schemes, to prevent new schemes from emerging. There are further calls to also spread the tax burden on to the promoters, agencies and employers that encouraged individuals to join these schemes. 

Timeline: Computer Weekly articles about the Loan Charge scandal

November 2019: Loan charge under review: The 20-year retroactive tax policy pushing IT contractors to the brink.

November 2019: Lib Dem election manifesto: Party vows to scrap loan charge and review IR35 private sector reforms.

December 2019: Release of loan charge review must be prioritised by new government, urge IT contractors.

December 2019: HM Treasury mulls loan charge review findings, but will not confirm public release date.

December 2019: Loan charge review results: Government agrees to policy amendments to cut tax bills of 30,000 people.

Janaury 2020: Loan charge under review: HMRC to invest £200,000 in readying IT systems for planned policy changes.

January 2020: Loan charge under review: IT contractors slam government's planned policy revamp.

February 2020: Loan charge MPs quiz contractors on ‘unreasonable behaviour’ claims made about HMRC’s case handling.

February 2020: IR35 reforms: IT contractors warned off joining non-compliant umbrellas to avoid loan charge risk.

March 2020: HMRC CEO denies it is ‘deliberately misleading’ public over loan scheme promoter arrests.

March 2020: MPs double down on criticism of HMRC's loan charge enforcement action report.

March 2020: Loan charge MPs secure ‘unanimous’ support for motion to curb policy’s retrospective powers.

March 2020: Cross-party group of MPs calls on Loan Charge contractors to participate in call for evidence.

April 2020: Loan charge contractors face double whammy of life-changing repayment demands as past loans recalled.

June 2020: MPs urged to back Finance Bill amendments to loan charge policy.

June 2020: Loan charge MPs denied House of Commons vote on Finance Bill policy amendments.

June 2020: HMRC and Treasury accused of ‘direct interference’ in independent loan charge review.

July 2020: Loan charge: Government dashes hopes of revised down settlements for contractors.

August 2020: Loan charge: Tax compliance charity demands criminal fraud investigation into scheme promoters.

August 2020: Loan charge MPs urge chancellor to get HMRC to soften contractor settlements.

September 2020: Loan charge under review: Government’s tax policy set to be challenged under EU law.

January 2021: HMRC criticised over continued ‘shortcomings’ in loan charge policy response.

February 2021: HMRC accused of 'utter hypocrisy' over use of IT contractors enrolled in tax avoidance schemes.

February 2021: HMRC denies misleading House of Lords over IT contractors’ use of tax avoidance schemes.

April 2021: IR35 reforms: Loan charge and employers’ NI issues prompt calls for legislative revamp.

April 2021: HMRC downplays significance of CEO email ‘questioning’ legal basis of loan charge policy.

April 2021: Loan Charge Group MPs demand IR35 shake-up to stop contractors becoming ‘zero-rights employees’.

December 2021: Loan charge: MPs call on financial secretary for new independent review into HMRC policy.

December 2021: Loan charge: Tax experts call on chancellor for simpler, more affordable policy settlement terms.

June 2022: Loan charge MPs want contractor adviser community to participate in latest call for evidence.

September 2022: New prime minister Liz Truss urged to press on with IR35 and loan charge policy reviews.

November 2022: Loan charge contractors hit with fresh loan repayment request from new firm.

April 2023: HMRC defends removing names of known tax avoidance schemes from public list.

September 2023: HMRC names and shames non-compliant umbrella firms for running tax avoidance schemes.

January 2024: MPs flag similarities between HMRC's treatment of Loan Charge contractors and Post Office scandal.

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