Earlier this month, a group representing UK contractors wrote to new Prime Minister Boris Johnson and Sajid Javid asking them to follow through on commitments they both made on IR35 and the Loan Charge, two taxes being heavily enforced by HMRC which are hitting contractors and freelancers hard.
The Loan Charge in particular, which aims to recoup tax from workers who were paid using tax-free loans from offshore trusts, has been heavily criticised.
In June, Boris Johnson said that the loan charge needs a “proper independent review” and Conservative Party MP David Davis, among others, has been a staunch critic of the charge, saying the loan charge is “a tax policy that is destroying families, homes, mental health and even lives”.
It is easy to see why many contractors and freelancers are worried about the impact of this charge. If the charge is not suspended, up to 50,000 people will be forced to pay retrospective tax on up to 20 years of income in one year, which could see HMRC recoup up to £3.2bn in tax as businesses go bankrupt and homes are lost.
Any contractor or freelancer who was paid through one of these schemes who has not already settled their debts before April 5 will be forced to pay the charge by 31 January 2020. Those who met the April deadline have until August 31 to complete the process or also face the loan charge.
Loan Charge has increased HMRC’s income
There are signs that the loan charge has already increased the tax man’s income from offshore assets in the last year. According to UHY Hacker Young, HMRC collected £34bn, a 27% increase on last year’s take from such assets. Of that £34bn, £13bn was cash, up from £10.3bn the year before. The rest is made up of projections of “avoided losses”, a questionable way of describing collected tax.
A spokesperson at HMRC said that it was unlikely the loan charge was the cause of this increase, and that the organisation expects to see more of an increase when the January 2020 deadline rolls around, and that taxpayers settling what they owe could have accounted for an additional £1bn of the £13bn that was collected.
What is the loan charge?
The loan charge will charge freelancers and contractors all outstanding tax from any ‘disguised remuneration’ loans made since 6 April 1999. The government introduced IR35 in 1999 in an attempt to class many freelancers and employers, which it viewed as no more than a way to avoid paying NICs.
Employment umbrellas were set up and promised employees safety from the vagueness of IR35, while claiming to be approved by UK Tax Authorities, Queen’s Counsel and top accountancy firms. These schemes allowed employers to pay freelancers and contractors through a ‘loan’ structure.
If a person who was paid under such a scheme has taken no action to settle their tax affairs beforehand, HMRC will treat any amount equal to the value of all outstanding loans as income as arising on 5 April 2019 – the tax on these amounts is the loan charge.
Despite the heavy criticism from multiple corners, HMRC is pushing ahead with the charge. Tax expert Clive Gawthorpe from UHY Hacker Young said: “HMRC has managed to collect a bumper yield from investigations into individuals but it comes at a cost.”
“HMRC’s approach to the loan charge was heavily criticised for being draconian but it pushed on with its schedule regardless. A bigger cash hoard was the net result.”
Accountants have also criticised HMRC’s campaign as a ‘fishing expedition’, as it sent out thousands of letters to people regardless of their personal circumstances. Some contractors being targeted were not aware of the implication of signing up to such an agreement with their employers, believing the scheme and their agreement to be perfectly legal.
A support group, called the Loan Charge Action Group, explains that the issue dates back to 1999 when IR35 was first introduced. IR35 was a piece of legislation which sought to classify some contractors and freelancers as employees and to ensure they were paying NCIs.
These schemes have been known about for a long time, and HMRC should have done a lot more to deal with the situation years ago. Had they done so, many more people would not be facing the prospect of extremely large tax bills they now cannot pay.
This led to a grey area opening and saw employment umbrellas promise employees safety from IR35. Claiming to be approved by tax authorities and other regulatory bodies, employees were referred to these umbrella employers and entered into an arrangement involving remuneration through a ‘loan’ structure.
It is earnings through this structure that HMRC are now looking to tax retrospectively, which means thousands of people who did not necessarily understand the tax complexities involved are now legally obliged to declare these earnings as loans and pay up to 20 years of tax in one go.
Who is responsible?
While some may argue that those who entered into these agreements should have known they should still have been paying taxes on these earnings, it is clear from the sheer volume of people who will be impacted that there was a lack of awareness and understanding.
Meanwhile, HMRC would have been aware that such umbrella schemes were operating, which begs the question: why was something not done sooner?
George Turner of TaxWatch UK was highly critical of both the promoters of the umbrella schemes and HMRC’s handling of the situation, saying: “The loan charge fiasco shows the mess that can be created when peddlers of tax dodging schemes collide with HMRC inaction.
“There is no doubt that many of the schemes promoted were highly questionable, and involved routing huge amounts of money around offshore trusts with the sole intent of getting people out of paying tax.
“The promoters of these schemes claimed that they were all perfectly legal, the reality was that they were extremely risky and the lawyers signing off on the schemes had a direct financial interest in getting as many people to sign up as possible. It was predatory and parasitic behaviour of the highest order.
“However, these schemes have been known about for a long time, and HMRC should have done a lot more to deal with the situation years ago. Had they done so, many more people would not be facing the prospect of extremely large tax bills they now cannot pay.
“The loan charge demonstrates how not having a full functioning tax authority can lead to people being exploited by malicious advisors.”
It is reported that local council, government departments and even HMRC themselves were hiring contractors through such schemes to help balance their books in the era of austerity. The BBC has also been a high-profile case, with even NHS trusts actively recommending that such schemes are used.
While the tax man cracks down on individuals who, rightly or wrongly, were employed under these schemes, we know that the super-rich and large corporations actively engage in aggressive tax avoidance schemes that on the whole could regain far more than the projected £3.4bn in taxes.
The Loan Charge is costing people more than money
The ‘cost’ of this policy, referred to by Gawthorpe, has not just been seen in contractor’s bank accounts, but in some cases has impacted their mental health.
According to a BBC report, the Loan Charge played a part a man’s suicide, resulting in his daughter also urging the suspension of the policy, saying that her father believed he was a criminal and had become obsessed with his tax affairs relating to the Loan Charge.
The consultant engineer who was in his late sixties told his family that he gad been getting just two or three hours sleep a night out of worry over the Loan Charge. Speaking to the BBC, his daughter Gayle said: “He wrote about it and said his brain turned to mush. I think the loan charge consumed him. That was all he could think about.
“He said he’d spent hours and hours and hours thinking how he could get through it and resolve it. And he just couldn’t come up with anything. I just don’t think he could see any light at the end of the tunnel at all.
“As it got to probably the last 12 months of his life he would mention it more often and he became a bit more distant and he wouldn’t commit to doing things with the family or many things because he would say; ‘Not until this tax thing has been sorted out; I can’t even think about that. We need to wait.”
Will it be scrapped?
There is a large backing to scrap the loan charge in the House of Commons. More than 200 MPs have called for a suspension and independent review of the policy, with a total of 151 MPs joining an All-Party Parliamentary Group (APPG) on the loan charge, which highlights their concern about the affects pressure from HMRC is having on their constituent’s mental health and family lives.
The onus is now on the government. With the August 31st deadline only a matter of days away, will Boris Johnson and his administration take action and suspend the loan charge, or at least order an independent review as he suggested, or are they too preoccupied with another looming deadline that seems to have put all other issues in its shadow?
It is clear from the potential damage the Loan Charge will have on the lives of contractors and freelancers that something needs to be done. Boris Johnson’s previous pledge to order an independent review of the policy must be acted upon before anymore more livelihoods, and lives, are lost.
LOAN CHARGE UPDATE – 5th September 2019
Yesterday, during a Prime Minister’s Questions that will likely go down in history as being full of drama largely cantered around the issue of Brexit, Boris Johnson announced a review into the Loan Charge.
Amongst the Brexit chaos, the announcement came as a surprise to many, but will come as welcome news to the 50,000 people who have been affected by the policy has been heavily enforced by HMRC.
The Prime Minister made the statement following a question from fellow Conservative MP Ross Thompson, who asked Johnson what action the government was taking to address the issue, to which he replied: “It is a very, very difficult issue and what I have undertaken to do is have a thorough going review.”
However, critics have said that any review is meaningless without the suspension of the policy.
George Bull, senior tax partner at RSM said: ‘The Prime Minister’s announcement of a new review into the loan charge will be welcomed by many of the campaigners who have been pressuring the Government to act.
‘However, the timing of this announcement is somewhat bizarre, given that we have already passed the 31 August deadline for the finalisation of voluntary settlements and two further deadlines are looming.
“Without further details on the terms of reference and the crucial question of whether the loan charge policy will be suspended pending the outcome of this review, campaigners will need to keep the champagne on ice.”
So far, HMRC is yet to respond in full, saying that the government ‘will set out further details in due course’.