Thousands encouraged to join bad tax schemes

Tax consultants are continuing to advise freelance workers and contractors to enter into tax avoidance schemes which could result in bills for hundreds of thousands of pounds in the future, according to MP for Brentford & Isleworth, Ruth Cadbury. Not only that, but the schemes are being promoted now to workers who earn far less than those who have already found themselves having to pay hefty fines for using them.

Until now it has been relatively high earners who have fallen foul of the schemes. As a result, it’s estimated that some 100,000 self-employed people have received hefty charges from HM Revenue and Customs, an unforseen tax bill for income earned several years previously, which many of them are now struggling to pay.

Although they have benefited from paying relatively low tax, people make major life decisions on their estimated disposable income; they take out mortgages and send their kids to private school; they spend the money. The sudden realisation that they face crippling and unexpected debt causes huge stress and anxiety, and there have been seven suicides directly connected to the HMRC’s Loan Charge, made retrospectively on those who have been using the schemes.

‘Disguised remuneration schemes’ – aka dodgy tax avoidance schemes

The tax avoidance schemes in question are ‘disguised remuneration schemes’ in which employees are paid via third party companies, usually based off-shore, which “loan” the money to the worker.

I spoke to an IT worker in Chiswick who now owes HMRC £180,000 because she benefited from one of these schemes. The woman, let’s call her Hayley, says it was advertised as ‘QC and HMRC approved’ and she had no clue she was doing anything wrong.

Loans aren’t taxed, but these loans were never intended to be repaid, so in 2011, as a result of a clarification in the relevant law, HM Revenue and Customs decided to treat them as tax avoidance. There followed new regulations, introduced in the 2017 Budget, which resulted in the Loan Charge being imposed retrospectively in 2019.

Hayley, who moves from contract to contract with different clients, had been advised to use an umbrella company to sort out her tax, which she did between 2010 and 2016. It was less hassle than setting up an independent company of her own and she was attracted by how easy it was.

HMRC sent their correspondence to an old address for her, despite her current address being on her self assessment tax form, so by the time she found out she owned money for those six years, they’d piled on interest and penalties. She was told by HMRC in 2017 that she must pay £180,000. If she didn’t settle the amount would go up to £240,000.

MPs inundated by anxious constituents

The average loan charge appears to be over 100,000, with some charges running into several million pounds, and when the extent of the financial hit began to be known, MPs were deluged with petitions from anxious constituents.

An All-Party Parliamentary Group was formed, with Sir Ed Davey, Lib Dem MP for Kingston and Surbiton, as chairman and Ruth Cadbury as vice-chair. They heard submissions from those affected, including the family of one person who’d killed himself because of it.

The All-Party Parliamentary Group warned in November that the attitude of HMRC towards the loan charge was “wreaking havoc” on taxpayers, that it was unfair for the charge to be made retrospectively and that many of those affected are suffering with severe mental health issues because of it.

Andy Earnshaw, one of the founders of the Loan Charge Action Group, which now has around 4,000 members, says he had a nervous breakdown when he realised the extent of his liability, and had to take time off work because he couldn’t cope with the stress of it.

In a survey of 2,086 individuals affected by the Loan Charge, carried out by the action group, one-third of participants had sought counselling and medication to cope with Loan Charge-induced stress, and 40% indicated that they had also “seriously considered” suicide.

‘It is time that the Treasury and HMRC stopped trying to make excuses and issuing misleading statements but instead accepted the impact their demands are having’ wrote Ruth Cadbury, in March.

Independent report advises on changes

At the urging of the All Party Parliamentary Group, an independent review was commissioned , to be carried out by Sir Amyas Morse, the former Comptroller and Auditor General and Chief Executive of the National Audit Office.

He took evidence from all concerned and his report went to the Government during the election. It was made public on 20 December. He acknowledged that contract workers and freelances had signed up for these schemes on the advice of tax professionals. He concluded that it was therefore unfair of HMRC to have made the charge retrospectively on income dating back to 1999.

His recommendations will now be subject to new legislation to be introduced by the new parliament, but that still leaves many thousands of people with huge bills which were totally unexpected and which they now can’t pay.

In his report Sir Amyas Morse said:

“The foundation of our tax system is fairness and where this is undermined through avoidance schemes it is right that these are tackled.

“However, in doing so, the government and HMRC must act proportionately and responsibly.

“As my review makes clear, the design and delivery of the Loan Charge didn’t get the balance right between tackling tax avoidance and protecting the rights of taxpayers and, in some cases, has caused serious distress to the individuals affected.”

His recommendations, accepted by the Treasury, were that:

• The charge is only applied to loans taken out since 2010, rather than the original date of 1999.
• Those who declared their loan on tax returns since 2010 and were not contacted by HMRC will also be exempt from the charge.
• The deadline for paying the charge will also be moved from January to September of this year, allowing payments to be spread more easily.
• People can now elect to spread the amount of their outstanding loan balance evenly across three tax years

Campaigners’ response

The Government’s acceptance of Sir Amyas’ report means that some 30,000 people will have their tax bill reduced, and 11,000 will have nothing to pay, but campaigners say the recommendations don’t go nearly far enough.

The Loan Charge Action Group welcomed the report, which they say vindicates their members as law abiding tax payers, but they say:

“We do still believe that it is wrong to have the Loan Charge retrospectively apply between 2010 and 2017, when the law was actually passed – this still sets a dangerous precedent”.

Ed Davey, called the new 2010 deadline “meaningless” and said any retrospective demands for tax payments should be abolished entirely.

Senior Conservative MP David Davis, the former Brexit secretary, said HMRC had given “reassurances that the schemes were legitimate” in the past and only clarified the law through the Finance Act in 2017.

“The reality is that those affected by the loan charge were advised by promoters of the schemes that the arrangements were perfectly fine.

“In some cases HMRC itself gave reassurances that the schemes were legitimate.

“The Treasury needs to take a common-sense look at these proposals and ensure no loans before 2017 are included in the scope of the loan charge.”

“Constant pressure”

For Hayley the nightmare continues. “There is constant pressure all the time” she says. “It underlies everything”. She’s been with her boyfriend for seven years. They would like to get married but she doesn’t want to make him responsible for her debt.

“There are just whole days which I’ve spent crying” she told me, and the constant pressure is enough to destroy a relationship. They can’t make plans which involve big financial decisions. They went on holiday and spent the whole time arguing about what they should do.

“It’s a massive weight on our shoulders and this stuff is never going to go away” she says.

While she has shared her problems with her boyfriend – let’s call him Stephen – she knows of others who have struggled with it by themselves. One man they know, with children, who has not told his wife.

“You feel criminalised. You feel silly. You’re a professional; you feel you should have seen it coming. You can’t tell your family.

“I feel so guilty, for dragging Stephen into this, for feeling like this when there are people who are worse affected than me”.

She still has no idea how she will pay the money owed. Her current contract has come to an end and the market for contractors is drying up she says, because of the tax problems clients face when employing them. One of her worries is that if she is made bankrupt that will be the end of her career, as most of her work is in the banking sector.

Campaigners have welcomed Sir Amyas’ report, but it still leaves many thousands of people, like Hayley, with huge bills which were totally unexpected and which they now can’t pay. And instead of the schemes themselves being made illegal, it seems a whole new catchment of people are being sucked in without realising they are storing up financial troubles for the future.

“Reprehensible” promoters still selling these schemes

Despite the controversial nature of these schemes and the publicity there has been about them, perhaps the most shocking aspect is that tax consultants still promote them.

In his independent review, Sir Amyas says: “The loan charge was intended to shut down loan schemes, but the review found there were more first-time users in 2017-18 (over 6,000) than in any year dating back to 1999-2000”. This he says is “reprehensible.”

“Scheme usage continues to be extensive in the 2019-20 tax year to date, with over 8,000 individuals having entered into loan schemes between April and October 2019. A key driver of ongoing scheme usage is a limited number of promoters and professional advisers who are selling schemes in spite of knowing that they will not deliver the tax benefits being promised.”

As Ruth Cadbury highlighted to me when I spoke to her about this, the evidence from HMRC, as outlined in Sir Amyas’ review, is that the typical profile of new users of these schemes has changed. There is now a higher volume of less affluent users because the marketing of loan schemes has changed to target them.

“Genuine, honest taxpayers find themselves caught up in this and the Government doesn’t appear to be doing anything to stop these people being caught” she said.

Caught up in this?

If you are one of those freelances who has been caught up in this, Hayley says don’t struggle with it alone. Being part of the Loan Charge Action Group has helped her enormously with coping with the stress, and she says Ruth Cadbury’s support has been fantastic. There are at least a hundred people in Hounslow struggling with this problem, including a small group in Chiswick, who support each other.

If you would like to get in touch with Hayley, email us at and we will pass your email on to her. You can contact the Loan Charge Action Group through their website.

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