The Proposal to Resolve the Loan Charge

We, a group of independent tax professionals, are proposing a solution to the problem of historic disguised remuneration (DR) schemes that have caused HMRC to pursue hundreds of thousands of contractors and freelancers for outstanding taxes believed to be due. While we support efforts to tackle promoters of tax avoidance schemes, and the need for a longer-term solution to the growing problem of mass-marketed schemes being used in future, we have yet to see any successful attempt to resolve this particular problem.

Unfortunately, the situation between HMRC and affected taxpayers seems to have reached an impasse – a view which is supported by evidence from the Low Incomes Tax Reform Group (LITRG). 

A fresh approach is called for, since affected taxpayers simply cannot afford to pay the taxes HMRC are demanding of them. The taxes being demanded often involve life-changing sums, typically multiples of their current annual earnings (if indeed they are still earning). This has resulted in serious financial hardship, often with devastating consequences for affected taxpayers’ lives and livelihoods. Sadly, this has led to a number of suicides (nine affected taxpayers are now known to have taken their own lives, this has been confirmed by the Treasury), and there are frequent reports of others who are suicidal.

We therefore believe that it would be pointless for HMRC to continue pursuing these individuals for the taxes believed to be due from them. Not only would it cause yet further hardship and misery for those affected, but the current deadlock between HMRC and affected individuals, and HMRC’s continued pursuit of them, would only continue to generate negative publicity for both HMRC and the Government, particularly in light of recent Freedom of Information Act (FOIA) disclosures. Clearly, this is neither in HMRC’s nor the Government’s interests, and for the Government and HMRC to continue along this path is self-defeating and unsustainable.

What we recommend instead is that the Government work with HMRC to introduce a “Disguised Remuneration” (DR) settlement opportunity, as they did for the (now closed) Employee Benefit Trust Settlement Opportunity (EBTSO), but on different terms. Any DR settlement opportunity should promptly resolve open enquiries and encourage affected taxpayers to settle unprotected years on individually negotiated terms, thus ensuring finality for affected taxpayers. It should also be affordable, easy to understand, and ensure that where an individual had tried in the past to be compliant, they are given credit as appropriate. In this vein, we would recommend that HMRC consider making proportionate adjustments to sums being demanded from affected taxpayers who have already settled with HMRC on a less generous basis, or who are continuing to do so.

The proposed settlement opportunity would not be intended for individuals who knowingly took a risk with a tax avoidance scheme, but for contractors and freelancers – gig economy workers – many of whom were either inadvertently dragged into these schemes or who were inadequately advised of the risks. These people are now facing unaffordable and often life-changing tax bills. We do not think the Government or HMRC could possibly have intended for the tax system to penalise this group of people so heavily. These people are the lifeblood of our economy, and many of them have also missed out on Coronavirus Job Retention Scheme (CJRS) and Self- Employed Income Support Scheme (SEISS) support.

The vast majority of those affected by the Loan Charge took and followed professional advice. Surveys have shown that the main motivation for contractors was not to seek to avoid tax, but rather to avoid the danger of being deemed to be “inside IR35” and the lack of clarity about how to structure freelance work. Unsatisfactory legislation has thus played a key role in the whole Loan Charge debacle and it now needs Government intervention to resolve this, not only to end the nightmare faced by thousands of families who cannot pay the sums being demanded, but also for HMRC, for whom the cost of, and resources involved in, implementing and defending the Loan Charge has been significant, with relatively little gain in terms of revenues.    

The case for a “Disguised Remuneration” settlement opportunity

There are five reasons why we think that a “Disguised Remuneration” settlement opportunity would be a sensible way forward.

1. Agencies should have operated PAYE

The first of these reasons is that the agencies involved in these DR schemes should have operated PAYE in the first place, according to the relevant legislation and case law. More specifically, HMRC could have (and should have) used the agency provisions of section 44 ITEPA 2003 to collect the PAYE income tax that was legally due from the agencies, rather than simply resort to applying the Loan Charge in the first instance. Had HMRC enforced the agency provisions of section 44 ITEPA 2003, not only would HMRC have likely raised more revenue than the sums involved in the Loan Charge and related demands, but also the individual users would have had a PAYE credit to fully offset their income tax liability (whether under the Loan Charge or otherwise), and the entire Loan Charge debacle could have been avoided.

In addition, even if HMRC are legally able to retrospectively disapply the operation of PAYE under S.684(7A) ITEPA (which they have been doing under their policy of forgiving those businesses who did not secure their supply chains and were therefore ignorant of offshore parties in it) this should only be done after a thorough and complete investigation of the facts.   Because it would be time consuming and resource-intensive for HMRC to do this, they are taking a blanket decision to retrospectively disapply PAYE regardless of the facts.  This will lead to an inevitable glut of Judicial Reviews which will be time consuming and costly for all parties.

On this basis, we feel that a DR settlement opportunity should include terms reflecting the fact that agencies should have paid the required PAYE and NICs, and should also recognise the fact that HMRC failed in their duty to collect it when they could and should have done. As the Loan Charge APPG has previously suggested, due to the circumstances surrounding the use of the schemes now subject to the Loan Charge, the tax burden should not fall solely on the individual users of these schemes, but also on the employers/agencies and also – ideally and appropriately – the operators/promoters of the schemes, with HMRC accepting lower sums as an acknowledgement of their own failures to collect PAYE from the agencies.

2. DR schemes were mis-sold to affected taxpayers

The second of these reasons is that the vast majority of affected taxpayers were genuine victims of mis-selling, rather than deliberate tax avoiders. While we acknowledge and appreciate the difficulty in distinguishing between the two groups, there is plenty of evidence to suggest that mis-selling occurred on a sufficiently widespread scale to the point where, in our view, HMRC and the Government should be able to justify automatically admitting any taxpayer who considers him/herself to have relied on a promoter’s statements in good faith, or to have been inadvertently caught up in one of these schemes, as a suitable candidate for the settlement opportunity. (The widespread nature of the mis-selling is evidenced in part by an APPG survey (May 2021) which shows that the promoters or scheme operators either made claims along the lines of ‘tax law compliant’; or ‘QC approved’ that turned out to be hollow or false, or otherwise failed to mention or adequately draw the taxpayer’s attention to the potential risk of challenge by HMRC (and even where mentioned, representations were made to the effect that this would all be dealt with by the scheme operator). 

In this vein, we would also recommend that HMRC not insist that the taxpayer candidate provide written proof of mis-selling, since many of those affected will no longer have the paperwork to prove that they were victims of mis-selling. Although we acknowledge that the risk of claims made by taxpayers with tax avoidance as their main motive cannot be completely ruled out, we feel that the benefits of a DR settlement opportunity would far outweigh any risk of claims of that nature.

Therefore, as emphasised above, we strongly recommend that the sum to be levied in this settlement opportunity be genuinely affordable (and significantly lower than any other settlement opportunities). In practice, this would mean HMRC collecting only a proportion of the tax that HMRC believed is due. This proportion should also reflect the reality that the vast majority of affected taxpayers were genuine victims of mis-selling, rather than deliberate tax avoiders. The settlement opportunity should also accept that, whilst the individuals concerned would have paid some more tax had they structured their arrangements differently, there is clearly significant fault on the part of (a) scheme promoters/operators, who recommended these schemes and (b) HMRC, for failing to collect PAYE from employers, failing to properly shut down these schemes and failing to adequately warn people not to use them at a time when such a warning was needed, rather than after the fact. Rather than the current patently unjust situation in which scheme users are the only ones being punished and are being asked to contribute sums many simply cannot pay (and many more cannot do so without selling their home or remortgaging, raiding their pension etc. or borrowing money) a fair and final resolution along these lines would acknowledge that the whole situation was a mess and fault should not be attributed– nor tax bills charged – only to those who used these schemes and in good faith.

In addition, unlike previous settlement opportunities, we strongly recommend that HMRC and the Government not insist that people admit fault or make a declaration of guilt as a precondition for using the settlement opportunity. When so many people were mis-sold these arrangements (with some having been effectively coerced into using them as a condition of engagement, and others having no knowledge of the fact that they were being “sold” anything at all), we feel that it is wrong to force people to give a false admission that they are deliberate tax avoiders. Many taxpayers who would otherwise have been suitable candidates for previous settlement opportunities were in the end unable to settle with HMRC, as making such a declaration could or would have negatively affected their job prospects, as some sectors would not engage or employ anyone who admitted to deliberate tax avoidance. We therefore strongly recommend that HMRC and the Government consider this recommendation seriously and accept the reality that the proliferation and mis-selling of DR schemes was the fault of several parties other than the taxpayers to whom these schemes were sold, and that the settlement opportunity reflect that reality as part of a fair and final resolution.

3. Scheme users under the Eclipse Settlement Opportunity have thus far been treated more favourably than DR scheme users

The third of these reasons is that the recent Eclipse Settlement Opportunity suggests that HMRC have been willing to accept less tax (in the form of clawed-back reliefs) in exchange for not pursuing affected taxpayers for what would have been significant “dry” income tax charges. In that sense, our proposal is asking for something similar, except that the quid pro quo would be for HMRC to accept an individually negotiated percentage of the tax believed to be due on outstanding loan balance in exchange for not pursuing affected taxpayers either for tax under the Loan Charge or for the full tax which HMRC believed to be due. Although these taxes are not technically “dry” tax charges, the underlying principle is the same as that of the Eclipse settlements, in the sense that affected taxpayers simply do not have the cash to pay the full tax believed to be due; and for HMRC to insist otherwise would result in even more bankruptcies and undue financial hardships– something that HMRC was keen to avoid in relation to the Eclipse scheme users. Furthermore, if HMRC was willing and able to grant a settlement opportunity of this nature to Eclipse scheme users who knowingly entered into a tax avoidance scheme, then all the more reason why we would strongly encourage HMRC to consider a settlement opportunity as outlined above for DR scheme users who did not knowingly enter into a tax avoidance scheme.

We therefore believe that there is considerable merit in implementing a settlement opportunity for DR scheme users, particularly as HMRC have recently implemented the (now closed) settlement opportunity for remuneration trusts and we understand are considering implementing settlement opportunities for enterprise zone relief schemes.

4. Lack of closure and finality with the Loan Charge

The fourth reason why we think a settlement opportunity should be considered is that paying the Loan Charge (or settling to avoid it) does not resolve the underlying tax dispute, and thus does not give the taxpayer any sense of closure or finality. This is not only unfair, but also cruel; as it means that affected taxpayers, even after they have paid HMRC life-changing sums, know that HMRC is entitled to make subsequent demands. For this reason, we strongly recommend that the settlement opportunity involve closure of all outstanding related tax enquiries and related Accelerated Payment Notices, and should include wording to confirm that, in accepting this settlement opportunity, HMRC undertakes to close the matter once and for all, without further recourse to the affected taxpayer – thus ensuring finality for the taxpayer. In particular, if settlement is reached, the subsequent release or writing-off of all such loans and any liability to pay interest on them should not then be treated as a chargeable “relevant step”, or the taxable value of any such relevant step should be reduced to nil.   

Indeed, rather worryingly, we are hearing of cases where HMRC are advancing arguments in some cases which are diametrically opposite to those being advanced by them in other cases. The inevitable conclusion is that HMRC are willing to run any argument that suits them in any instance in order to maximise the possible tax-take. For this reason, it is essential that any settlement provides a complete resolution and does not afford either party an opportunity to make subsidiary claims on the other.

5. Request for legislation to protect affected individuals from “loan” repayment demands

Finally, many creditors of record have been seeking to enforce repayment of what they believe to be outstanding loans due from affected taxpayers. Because the “loans” are treated as earnings for tax purposes, and an enforceable debt claim for contract law purposes, it puts affected taxpayers in the worst of both worlds.  

For this reason, in addition to the settlement opportunity described above, we strongly recommend that the Government consider implementing legislation to protect affected taxpayers from such “loan” repayment demands by the creditor of record where the “loan” in question is also subject to tax as earnings. In this vein, we draw your attention to the remarks made by the Chartered Institute of Taxation (CIOT) in their 30 September 2021 Budget Representation.   We would also suggest that HMRC work with the Insolvency Service to provide clear guidance to prevent liquidators from pursuing individuals for repayment of DR scheme loans previously granted to them by a company that has subsequently gone into liquidation.

The benefit to HMRC in implementing our proposal

Our proposal and recommendations offer a straightforward solution to the problems created by the Loan Charge debacle and the proliferation of DR schemes.  Not only do they offer welcome respite for affected taxpayers, but would also be of immediate benefit to HMRC. A settlement opportunity of this nature would not only free up HMRC resources for other areas but would also secure a better practicable return for the Exchequer in terms of future revenue flows, since it would allow affected taxpayers to continue working and to pay taxes in future.  From HMRC’s perspective, this surely must be preferable to the current situation in which affected taxpayers are forced into bankruptcy, unable to find work and/ or are relying on benefits.   For these reasons, we believe that our proposal is fully compliant with HMRC’s Litigation and Settlement Strategy (LSS).  In particular, we acknowledge and agree that resolving tax disputes means “establishing the right tax liability, fairly and even-handedly across all taxpayers, in a way which minimizes unnecessary costs” which we acknowledge and agree should not involve HMRC making compromises on what it believes to be the right tax liability consistent with the law.   Our proposal does not represent a compromise of that nature. Rather, we believe it offers an alternative solution that is consistent with the law and that ultimately secures the best practicable return for the Exchequer.  

We also wish to emphasize that our proposal should not be seen as letting affected taxpayers off the hook in a way that would result in unfairness to the rest of the taxpaying public, since affected taxpayers haven’t done anything wrong except be in the wrong place at the wrong time.   Insofar as there are any lessons to be learned here, they have nothing to do with taxpayer non-compliance and everything to do with the fact that there are unscrupulous promoters of DR schemes who will do anything to maximize their own profits at the expense of these taxpayers, with little regard for the consequences.   The historic and continued use of DR schemes shows that the Loan Charge has not had the desired deterrent effect on avoidance, evasion or other forms of non-compliance.   But we are not talking about taxpayer behaviour in this case.  The very fact that these schemes are still being used tells you a lot more about promoter behaviour than it does about taxpayer behaviour.

Recommendations for HMRC and the Government to consider

To implement the recommendations outlined above, we recommend that HMRC engage with the Loan Charge Action Group (LCAG) and others, including CIOT and the LITRG, to find a solution that would be acceptable both to HMRC and to taxpayers facing the Loan Charge, with the discussions supported by the Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) as necessary to ensure that both sides listen to each other.