Tens of thousands of IT contractors are facing life-altering tax bills related to projects they took on over a decade ago. This comes after they enrolled in schemes that compensated them with non-taxable loans instead of standard salaries.
These loan-based schemes were often coordinated by offshore employee benefits trusts (EBTs) and marketed as compliant with HM Revenue & Customs (HMRC). Many contractors were nudged into these agreements by trusted tax advisors, some even told that their work opportunities would vanish unless they accepted payment through loans.
Recent years have seen HMRC pursue these individuals due to a retroactive piece of legislation known as the Loan Charge. This initiative aims to recover taxes the government believes contractors avoided between December 2010 and April 2019. People now facing these backdated tax claims argue they were misled. Over 200 MPs from multiple parties have come forward to support their cause.
Despite the backlash, the Loan Charge policy remains unchanged, and calls for HMRC to redirect its efforts towards those who promoted these schemes have gained traction. The current approach feels akin to a witch hunt, as noted by Sammy Wilson, an MP for the Democratic Unionist Party. He pointed out that while HMRC pursues contractors, those who sold these schemes escape scrutiny. Many contractors are under immense pressure, with some tragically resorting to taking their own lives because of the stress resulting from these claims.
The Loan Charge policy came about as part of HMRC’s ongoing fight against tax avoidance, with its announcement included in the 2017 Budget. The government estimated it could recover billions in unpaid taxes using this policy, aiming to hold accountable those who opted for loan compensation rather than standard salaries. Initially, any contractor who participated in these schemes from April 1999 to April 2019 fell under the policy’s reach. Following an independent review in December 2019, it was recommended that the scope be narrowed to only those who joined after December 2010, lifting around 10,000 people from the policy’s target.
Critics argue that the Loan Charge’s retroactive nature is particularly unfair. Essentially, it retrospectively treats loans—previously viewed as non-taxable—as income, creating potentially devastating financial implications for contractors. Many individuals believed they were following legal advice, reassured by accountants and tax advisors that the arrangements were legitimate.
HMRC anticipated collecting around £3.4 billion through the Loan Charge over five years, but changes to the policy reduced expected revenues by an estimated £620 million.
Around 50,000 people are believed to be impacted by the Loan Charge, though advocacy groups suggest that number could be much higher. This group includes a significant number of IT contractors, along with workers from sectors like healthcare, education, and oil and gas.
The rise of these loan-based schemes correlates with changes in tax regulations introduced in 2000. The IR35 regulations aimed to clarify tax statuses for contractors, leading many to seek alternatives, including the dubious loan-based schemes that promised greater take-home pay. While some of these umbrella companies claimed HMRC compliance, the reality was often more complicated. HMRC has consistently stated that it never sanctioned such arrangements.
The emotional and psychological toll the Loan Charge has taken on those affected is staggering. Despite HMRC’s assertion that it won’t force individuals into bankruptcy, reports show that some have sold their homes to manage their debts. Disturbingly, HMRC confirmed that ten suicides have been linked to the stress of dealing with this issue. The agency even referred itself to the Independent Office for Police Conduct in these tragic cases.
An essential question looms: Do individuals caught in this policy need to repay their loans? Typically, loans aren’t considered taxable income. However, HMRC maintains that these should be taxed because they weren’t designed for repayment. Many contractors believed they wouldn’t have to settle these loans, only to find themselves facing demands for repayment, creating further financial strain.
Efforts to resolve the Loan Charge issue have taken several forms, but solutions have been elusive. Some individuals have sought settlements to put an end to their troubles but found themselves facing fresh demands from HMRC afterward. As MPs and advocacy groups urge action against those who marketed these schemes, the government has promised a second review of the policy following mounting pressure from those adversely affected.
As of now, HMRC is pausing any settlement actions for individuals caught in the Loan Charge while the review takes place, but the uncertainty continues to loom large over many lives.