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Loan charge: is it breaching the rule of law?

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SPECIAL REPORT: THE LOAN CHARGE

In a July session HMRC management including Jim Harra, the HMRC’s Chief Executive, was questioned by the House of Lords Economic Affairs Committee on the Loan Charge. The discussion spurred more questions than answers with one contracting expert suggesting after listening in to the discussion that the “loan charge breaches the rule of law.”


  • The Loan Charge “stacks” loans that the taxpayer has received, so that they are liable to pay a single charge based on the value of all outstanding loans
  • HMRC has also estimated that 50,000 individuals, and around 10,000 companies used these schemes and are potentially covered by the Loan Charge
  • HMRC has estimated that of individuals who used a scheme from 2011/12 onwards, 70% did so for two or fewer years and only 16% used a scheme for four or more years
  • No HMRC-led solution has been created to stamp out unlawful umbrella schemes in the gig and contractor economy
  • Thousands of contractors could go bankrupt as a result of the loan charges, losing their homes and pension savings
Photo by Andrea Piacquadio from Pexels

Thousands of bankruptcies for affected contractors?

The retrospective tax liabilities (loan charge) placed on contractors that have unknowingly signed up to fraudulent tax avoidance schemes via umbrella companies will likely create thousands of bankruptcies, according to Lord Forsyth who took part in the session. HMRC can recoup taxes from the victims of these schemes going back to 2010. 

“The loan charge scheme is a contentious subject and lives have been lost and ruined because of the retrospective pursuit by HMRC to recoup the tax from the victims of the scheme,” said Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance.

Homes will very likely be lost or sold in haste to pay off loan charges, which could very likely lead to pension poverty as many Brits, especially the self-employed, use their homes to fund their retirement. Stamp duty on a new home plus other charges, such as legal and moving costs, may not be available in a bankruptcy scenario. Those with no equity to fall back on could be in seriously dire straights.

From cleaners to cybersecurity specialists, when contractors have been let down by their umbrella employers, there is very little chance that they will have had a cushy employer pension contribution. According to research by Which? single pensioners will need a pension pot of £123,000 just for basics when they retire and as much as £305,000 to live a comfortable lifestyle.

HMRC enforcement strategy not going after the bad guys

A game of cat and mouse has been occurring for many years, according to Temple, as HMRC fails to stamp out the bad practice, chasing the victims rather than the promoters.

“HMRC’s enforcement strategy of going after individuals has provided further incentives to providers to offer these arrangements as they keep the money they make with all liabilities resting with the workers. Until this changes, we are likely to see a continued proliferation of these arrangments,” he said.

  • The loan charge will apply only to loans made on or after 9 December 2010 that were outstanding on 5 April 2019 subject to if the loan was made in an unprotected year.
  • If you were employed when you received a loan, the loan charge applies to outstanding loans made between and including 9 December 2010 and 5 April 2019.
  • If you were self-employed when you received a loan, the loan charge applies to outstanding loans made between and including 9 December 2010 and 5 April 2017. Any loans received after this date are still chargeable as income from self-employment and should have been included in your Self Assessment tax return for the relevant year.

Source: HMRC

Industries most impacted by the loan charge

Based on a ContractorCalculator survey of 3601 participants, of which 3320 were contractors, 229 were permanent employees and 52 were neither, 93% worked through their own limited companies. The IT sector is probably most impacted by the loan charge scenario, followed by engineering, finance, interim and project management.

Many limited company contractors felt a double blow this year by being caught up in the fraudulent umbrella schemes and loan charges to only be blanket banned by clients due to IR35 and off-payroll rules that came into place earlier this year.

The contractor’s point of view on the loan charge

Dave Chaplin, CEO of contracting authority ContractorCalculator

After tuning into the session on Parliament Live, Dave Chaplin, CEO of contracting authority ContractorCalculator said: “The Loan Charge is now fully exposed as a highly damaging retrospective tax designed to bulldoze through longstanding taxpayer protections, sending thousands of victims of unscrupulous operators into bankruptcy. And, all forced through Parliament by HMRC and Ministers based on misleading information. It is a massive scandal of their own making.”

Chaplin said that HMRC’s rebuttal to questions relating to Jim Harra’s email which appeared to contain an admission that he was unable to locate a legal basis that underpinned HMRC’s claims that the law was always clear did not convince him, and neither did it appear to convince the Lords.

“There’s a saying – when you’re in a hole, stop digging. HMRC continue to dig, but today finally hit the concrete floor of incontrovertible facts – that the Loan Charge breaches the rule of law,” said Chaplin.

“The problem isn’t the scheme users, it’s the scheme providers. It’s appalling that HMRC and Ministers are continuing to blame the taxpayers for the misdeeds of others. All this serves to do is encourage yet more unscrupulous providers to enter the market and prey on unsuspecting victims.”

Key Information Documents: what are those?

Chaplin said that some of the measures introduced are not yet working to help contractors. For example, there has been the introduction of Key Information Documents (KID) as a legal requirement but in a recent survey ContractorCalculator conducted with some 3000 contractors, 86% said that they had not been provided with a KID and 67% said they didn’t even know what a KID is.  You can make the rule book as long as you like but if you’re not enforcing the rules then they become meaningless.”

The umbrella specialist’s response

Crawford Temple, CEO of Professional Passport

Temple said of the recent session on the loan charge: “We heard more platitudes from HMRC. The reality is that for far too long HMRC has not been visibly and proactively enforcing the law and stamping out the corrupt schemes that have caused significant damage to lives and livelihoods.  Enough is enough.”

Temple said that the HMRC already holds all the information it needs to rid the sector of disguised remuneration schemes and rid the industry of criminal activity but is not acting on it. 

“As a result, the lack of inactivity has enabled more and more schemes to set up and more and more contractors duped into taking on significant personal financial risk as a result.

“HMRC has two sets of data available in the form of Real Time Information and Intermediary Reporting and matching up that data should help to spot a dubious provider and shut it down with immediate effect,” he said.

The compliance expert said that HMRC continues to drag its feet and with the new Off-Payroll legislation now in operation, the floodgates have opened to more schemes that will work to ruin more lives.

“HMRC needs to find a better way to notify potential users of arrangements, highlighting the risks and promoting the Personal Tax Account,” said Temple. 

“HMRC has two sets of data available in the form of Real Time Information and Intermediary Reporting and matching up that data should help to spot a dubious provider and shut it down with immediate effect.”

Crawford Temple, CEO Professional Passport

Current strategy allows bad promoters to thrive

Where a user is shown to have acted in a timely manner to change their affairs, no further action should be taken, according to Temple. 

“If the data is being interpreted correctly, such arrangements should be identified within a quarter.  If no action has been taken by HMRC within a 12-month period then, as with Self-Assessment, HMRC should be prevented from seeking recovery from the taxpayer and limited to recovery from the scheme promoter. As it stands, the current strategy is allowing more schemes to thrive, the victims are financially punished and the promoters get away scot-free.

“This step prevents taxpayers unwittingly being sold schemes that years later can destroy lives, as we have seen happen with the loan charge.  The risks then lie firmly on the companies making these arrangements for a fee.  Today HMRC admitted it had been ‘slow-footed’ to handle the criticisms of their campaign – I would say that HMRC has been slow-footed in shutting down these schemes that are purporting to be umbrellas and giving the whole industry a bad name,” said Temple.

All umbrellas should not be tarnished with the same brush, he suggested.

“I welcomed HMRC’s Director of Counter Avoidance Mary Aiston’s acknowledgement that there are compliant umbrellas providing an important service to contractors,” said Temple.

If you are considering joining an umbrella company, check out:

The Contractor’s Guide to Umbrella Companies

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