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

The IT contractor community shares its verdict on the UK government's plans to revamp its controversial loan charge policy, which has left thousands of people facing life-changing tax bills and financial ruin

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The government’s response to the long-awaited review of HM Revenue & Customs’ (HMRC) controversial loan charge policy has brought little comfort to the thousands of IT contractors facing financial ruin at its hands.

The review, originally due for publication in mid-November 2019, surfaced on 20 December, and made a series of recommendations about how the loan charge policy should be amended, in acknowledgement of the “distress and hardship” it is known to have caused since its introduction in 2017.

Back then, the policy was pitched by HMRC as a way for it to recoup the £3.2bn in previously unpaid employment taxes it claimed 50,000 individuals (many of them IT contractors) avoided paying by opting to be remunerated for the work they did between 6 April 1999 and 5 April 2019 in the form of non-taxable loans.

In HMRC’s opinion, these loans were never intended to be repaid and so should have been classified as taxable income. An amendment was therefore added to the Finance Act in 2017 that made it possible for HMRC to demand contractors pay the tax the agency claims they avoided during this 20-year window.

The headline recommendations made by the review include effectively cutting in half the length of time the policy covers, and introducing exemptions for individuals who declared their use of loan remuneration schemes to HMRC at the time.

With that in mind, the proposed amendments to the policy read like a good result for the thousands of IT contractors who – on the back of the policy’s introduction in 2017 – have found themselves saddled with “life-changing” loan charge-related tax bills relating to work they did up to 20 years ago.

However, Computer Weekly has received feedback from IT contractors about the review, and HM Treasury’s response to it, claiming the proposed changes will make scant difference to the precarious financial position the policy has put them in.

Revamping loan charge policy

For that reason, public sector contractor Jack Ortano said the review and its recommendations should be considered a starting point for revamping the loan charge policy, rather than the end of the discussion.

“The review, while a first step, hasn’t gone anywhere near far enough and more concessions are due,” he told Computer Weekly.

Scrutinising the loan charge review

The loan charge review set out to investigate if the policy “undermines taxpayers’ rights” and deviates too far from how the UK tax system usually operates, said its author, Amyas Morse, the ex-comptroller of the National Audit Office.

On the latter point, much of the criticism about the policy to-date has centred on the 20-year investigative window it gives HMRC to pursue people for unpaid employment taxes, and the precedent this potentially sets for retrospective taxation. 

HMRC typically only embarks on tax investigations dating back up to 20 years in cases where it suspects individuals have deliberately sought to evade tax. However, the loan charge is concerned with clamping down on individuals that HMRC claims have sought to avoid paying tax.

What is important to note here is that tax evasion is a criminal offence, but tax avoidance is not.  

This has led to accusations being fired at HMRC that the enforcement action it is taking against users of loan-based remuneration schemes is disproportionate and unjust, which is a perspective the Morse review endorsed.

“For a 20-year look-back period of the loan charge to be proportionate and justified, taxpayers would need to have acted in a way that was perverse in the light of a clear legal position. This was not the case,” the Morse review stated.

Shortening the look-back period

The review called for the loan charge look-back period to be shortened to the tune of around 11 years, so that the policy only applies to individuals or employers who entered into schemes after 9 December 2010.

This is one of the suggested amendments HM Treasury has agreed to adopt on the back of the review. It is claimed this move will result in 10,000 people falling out of the policy’s scope. Even so, there are still tens of thousands of others for whom the picture remains unchanged.

“Before the government changes, I was liable for slightly more than £250,000, and today, I am liable for exactly the same,” IT contractor Nicolas Grison, told Computer Weekly.

“I used loan-remuneration schemes between 2011 and last year, so the fact loans before 2010 are not out of scope doesn’t impact me. It does beg the question, why is retrospective tax [demands] over 20 years not okay, but over 10 years is okay?”

According to the Morse review, from 9 December 2010 onwards is when the “legal position” on the use of loan remuneration schemes became clear following the announcement of the Finance Bill 2011.

Around this time, HMRC also began to “consistently articulate” its stance that loan-based remuneration schemes do not work, the review continued.

Read more about the government's loan charge policy

HMRC, however, maintains in all its loan charge policy literature that it has “always” made its disapproval about the use of loan schemes known.

“While the position of loan schemes before 9 December 2010 is disputed, the view of most tax advisers and professional bodies we heard from is that the 2011 legislation is effective in ensuring that income paid through loan schemes is subject to tax,” the review said.

“The evidence given to the review was consistently that once the new legislation was introduced, reputable advisers advised clients against using a loan scheme. In short, their view was that, following the 2011 legislation, schemes entered into on or after 9 December 2010 would clearly generate an income tax consequence."

A question over clarity

This assertion has been contested by tax experts and contractors in the press, on private blogs and on social media since the contents of the review became public.

In the opinion of IT contractor Grison, a close-up inspection of the Finance Bill 2011 strongly suggests the selection of the 9 December 2010 loan charge look-back date seems arbitrary at best.

“The Finance Act 2011 only clarified the situation for loan-type schemes where there was an employer/employee relationship,” he told Computer Weekly. “A lot of the scheme users were self-employed, so by definition there was no link between employer and employee. And, as such, this [legislation] did not apply to them.”

Furthermore, the Morse review’s declaration that the legal position on using loan schemes “became clear” at that exact time is questionable given how many amendments were added to the Bill post-publication, continued Grison.

“The law was amended multiple times during the following year, which is proof that this was certainly not clear. Picking the date of 2010 is therefore arbitrary,” he said.

No evidence

Phil Manley, a director at tax consultancy PMTC, and an active member of the anti-loan charge campaigning community, backs this view. He told Computer Weekly there is “quite literally nothing” in the Finance Bill 2011 that states loans to self-employed individuals from this point became taxable.

“To state therefore that ‘the law become clear’ at this date is simply incorrect. Why would the loan charge even be needed if the law became clear in 2010?” he said. “If HMRC truly believe that in 2010 a piece of legislation stated that loans to the self-employed became taxable, I challenge them to point me to it.”

Computer Weekly put this specific question to HMRC, and was told the department has no comment to make at this time.

“Any self-employed clients of mine would have absolutely no reason whatsoever to have felt concerned at the introduction of the legislation in December 2010,” said Manley.

Steve Packham, spokesperson for the Loan Charge Action Group (LCAG), said this is why the group is actively campaigning for all retrospective elements of the loan charge policy to be removed.

“We [LCAG] continue to believe that the loan charge should not apply retrospectively at all and are concerned that many people will still be seriously impacted,” he said.

Computer Weekly raised all of the above points with HM Treasury, and was directed back to the statements the organisation published in the wake of the review on 20 December 2019, that show it is in agreement the Finance Bill 2011 “removed any doubt that tax was due”.

Clearing up the confusion

If it truly is the case that “the law became clear” at this point, then one has to wonder why did so many people continue to use these schemes after this date, with the Morse review quoting that more than 65,000 instances of loan scheme usage occurred between April 2011 and March 2016.

A contractor, currently in contestation with HMRC over a loan charge-related tax bill, who spoke to Computer Weekly on condition of anonymity, claims the fact people carried on using these schemes post-December 2010 disproves the review’s assertion that the “law became clear”.

“Every time there is a change to tax legislation, the people advising on tax planning take a view on it. If the arrangements they previously said work, don’t work anymore, then they stop [advising people to] use them immediately,” the contractor said.

“The [tax experts] are all professionals and they live and die on the basis of the advice that they give. If the advice is proven to be wrong in court then they are finished. HMRC’s, or anyone else’s, opinion is just an opinion. Only a court ruling determines what the actual meaning of the law is.”

At the same time, there were a number of other mitigating factors that may have prompted individuals to carry on using these schemes post-December 2010, said Manley.

“People continued to use the schemes for a mixture of reasons. Some were told it was necessary for the agreement of a contract, others to save on administration and a few will have done so to legally minimise their tax bills,” he said.

Minimising risk

As previously detailed by Computer Weekly, for many contractors, the use of loan-based remuneration schemes was a protective measure, as they were often marketed as a way of minimising the risk of being subjected to a long, drawn-out IR35-related investigation into their tax affairs by HMRC.

“Because of the way these disguised [loan] remuneration schemes were structured, in many cases, IR35 became irrelevant,” said Seb Maley, CEO of tax advisory firm Qdos Contractor. 

“Often, contractors stopped working through a personal service company and were paid through employment benefit trusts instead – which meant IR35 was no longer a consideration because these individuals became employees of the scheme. Many of these companies were based offshore too, which also meant that IR35 – a UK legislation – was avoided.”

Discrepancies in disclosure definitions

Another frequently raised criticism of the changes relates to the proposal that could see an estimated 1,000 people fall out of the policy provided a few caveats are met.

To qualify these individuals must have made a “full disclosure” to HMRC about their loan scheme usage that the agency failed to investigate further at the time. Specifically, this recommendation applies to individuals who took out loans between 9 December 2010 and 5 April 2016.

A similar recommendation appeared in the Morse review, but with an emphasis on excusing individuals who made a “reasonable disclosure” to HMRC about their loan scheme usage.

According to several contractors who spoke to Computer Weekly on condition of anonymity, a major issue with this proposal is that many contractors received conflicting advice in the past about whether or not they needed to disclose their loan scheme usage to HMRC.

Some claim they were told they did not need to disclose their loan-scheme participation on their tax returns by their accountants or the loan scheme promoters, whereas others were.

“People don’t know what the tax laws are, and they rely on experts to tell them what to do,” said the anonymous contractor.


Under the terms of the Disclosure of Tax Avoidance Schemes (DOTAS) legislation, scheme promotors are advised to register their setups with HMRC so it can ensure the mechanisms they employ to reduce their users’ tax burden do not infringe on its tax policies. Scheme users are then expected to notify HMRC of their participation in these schemes on their annual tax returns.

However, it is known that not all loan schemes are registered with DOTAS, and the operators of them will structure their setups so they do not bear any of the “hallmarks” that are likely to give HMRC cause for concern.

“Some advisors for some schemes disclosed, whereas some said no disclosure is necessary. Others actually disclosed on a ‘just in case’ basis, even if it wasn’t strictly necessary,” the contractor added.

On this basis, many contractors will struggle to meet the “full disclosure” requirement of the reworked loan charge policy, said public sector contractor Ortano, who participated in loan schemes for five years until 2017.

“Accountants and promoters advised the users not to disclose the loans on yearly tax returns and so to achieve full disclosure status is very difficult,” he said.

The lack of consistency between the advice contractors were given on this point is a matter the LCAG campaign group will be raising with MPs, as its ongoing efforts to get the policy scrapped continue apace in the wake of the review, it said in a statement

“This is unfair on those who were advised not to disclose or that they did not need to disclose. Individuals declared their usage of loan arrangements based on professional advice, and people will not be impacted for following this advice or on the basis of HMRC taking action. This is not fair to a large proportion of people,” the organisation said.

Scattergun approach

Another related point to all this, said IT contractor Grison, is that HMRC appears to have taken a scattergun approach in the past to deciding whose tax affairs should be subjected to further scrutiny and who should be spared.

“The very big problem with this is that it is completely random whether HMRC open an inquiry. It is down to pure luck.” he said. “The scheme promotor and accountant who did all my returns said there was no need to mention it, and now I’m out of luck. Depending on whose advice you followed, you win or lose.”

On top of all that, there is degree of confusion among contractors about what HMRC’s definition of “full disclosure” is. The agency has, however, said further guidance on this point will be forthcoming in due course.

Even so, PMTC’s Manley is of the view that HMRC should have adopted Morse’s original recommendation that anyone who made a “reasonable disclosure” to the agency about their participation should also be excused from the loan charge.

“The removal of post-December 2010 loans from the loan charge if ‘full disclosure’ was made to HMRC, and HMRC did not take protective action, is not even close to being fair or lawful. Taxation should not be based on a lottery system,” he said.

“There is no justification for leaving those who made reasonable disclosure within the charge. Enquiry windows are the backbone of the taxation system and have been for many years. The loan charge completely ignores this convenient fact.”

Computer Weekly contacted HMRC for a response on this point, but its representatives declined.

Loan charge exemptions: A short-lived reprieve?

Collectively these recommendations will benefit around 10% of Manley’s client base, according to his estimates, and a further 10% who will be “partially removed” from the policy’s scope, given their use of loan schemes spans the pre- and post- December 2010 cut-off date.

For those whose loans pre-date the December 2010 deadline, though, how long they will remain out of HMRC’s crosshairs is a matter of debate.

This is because the government’s response to the review also revealed that plans are afoot to create a new team within HMRC who will be tasked with collecting tax from pre-December 2010 scheme participants.

“The underlying tax liability for loans made prior to this date remains. HMRC will continue to pursue those liabilities through enquiries and assessments, and where necessary litigation,” said HM Treasury in its response to the Morse review.

“This will ensure people who entered into disguised remuneration avoidance schemes before 9 December 2010 still pay the tax due and make their contribution to funding public services.”

The fact this is happening risks undermining the review’s headline recommendation that the policy’s look-back period be shortened, said Manley.

“There is no point in the Amyas Morse review changes being implemented as HMRC plan to effectively ignore the reasonings behind them and instead find a workaround,” he said.

Next steps for the loan charge

The government has confirmed it will legislate to bring the aforementioned changes to the loan charge policy into force, with HM Treasury expected to announce details in the March 2020 Budget about the financial impact enforcing these recommendations is likely to cause.

For IT contractors feeling disheartened by the review’s findings – and the government’s response to them – there are still efforts being made on multiple fronts to get the policy amended further.

The cross-party Loan Charge All Party Parliamentary Group (APPG), for example, is expected to continue its push to have the retrospective elements of the policy removed completely.

This would mean only individuals who entered into (or participated) in loan schemes after the policy came into play in November 2017 would be subjected to paying the loan charge.

The APPG has also previously pushed for the Treasury to outlaw the use of loan remuneration schemes completely, which would certainly go some way to clearing up – once and for all – the legal position on using them.

At the time of writing, the organisation is in the process of re-establishing itself as an APPG, in the wake of the December 2019 General Election. Once that process is complete, it will be turning its attention to picking apart the Morse Review and its resulting recommendations, it has confirmed.

“Our [previous] work led directly to the Loan Charge review, which we know will lead to changes to the legislation,” said Loan Charge APPG co-chair Ed Davey in a statement.

Judicial review

Meanwhile, the crowdfunded LCAG judicial review, which is seeking to have the policy scrapped on human rights grounds, is on course to take place in February 2020.

On top of that, LCAG is advising affected contractors to write to their MPs and express their displeasure at the contents of the review and encourage them (if they have not done so already) to join the Loan Charge APPG.

In the meantime, there is just one question IT contractor Grison – and no doubt the thousands of others who have found themselves caught by the loan charge – want answered.

“Retrospective law is normally considered against the rule of law when there was no criminal activity, so one wonders why the loan charge policy should be allowed at all,” he said.

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