James Taylor, a pilot, has been landed with a tax bill of £200,000 he does not think he should have to pay and which he says would bankrupt him.
In 2009, after being put on a zero-hour contract by his airline, he was one of thousands of workers to enter a tax avoidance scheme.
Mr Taylor (his name has been changed at his request) was told to join an agency by his airline to manage his new contract and tax affairs. He and several co-pilots found one that promised increased pay via a “legally compliant” system. Instead of receiving a salary, attracting income tax and national insurance, workers in such schemes were instead loaned money — typically via an offshore trust — on terms that meant the debt was unlikely ever to be repaid. For this service, the agency received a fee of 15 per cent on the contractors’ earnings.
Mr Taylor’s co-pilots signed up straightaway, but he was suspicious. He says he called HM Revenue & Customs to check that contractor loans schemes were legal.
“They said they were aware of them and, yes, they were legal,” he recalls. However, HMRC said it could not advise him about entering the scheme or not. On the recommendation of his accountant, he went ahead. He reported his involvement on tax returns every year until 2014, when he moved abroad and left the arrangement.
Last year he discovered he faced a massive bill under the loan charge — a government crackdown on avoidance — unless he came forward to agree to repay the tax lost. He quickly wrote to HMRC to begin the process. A year and a half later he is still waiting to agree his settlement. However, a deadline of September 30 looms after which he will face the loan charge — despite wanting to settle.
“I’m a rat in a corner . . . and my income has gone to zero as aviation is shot [due to the pandemic],” he says. “Leaving settlement to the last minute means I am extorted into signing whatever HMRC sends, as the alternative ruins me.”
Unless you’re one of the 40,000 professionals like Mr Taylor engaged in a protracted battle with the tax authorities, you may skip over stories about the loan charge, thinking it has no bearing on your own affairs. But campaigners warn the saga reveals weak points in the UK tax system that should concern us all.
This includes the weak supervision of unregulated agencies, tax advisers and avoidance scheme developers, who face little consequence from their part in loan schemes. In Mr Taylor’s case, none of the other parties who enabled his tax avoidance or benefited from a reduction in income tax and national insurance — the airline, scheme provider or accountant — are being sanctioned. In fact, unscrupulous operators are pumping out new avoidance schemes for the unsuspecting; targeting among others NHS workers returning from retirement to tackle the pandemic.
Some also warn the loan charge has set a worrying precedent for retrospective taxation — changing the law to apply to the past, rather than the future. They argue this leaves taxpayers vulnerable at a time the government is under pressure to shore up the public finances.
“The loan charge casts a very dark shadow over our political system in the way it undermines the rule of law,” says Sir Ed Davey, leader of the Liberal Democrats and chair of the All-Party Parliamentary Group of MPs on the loan charge.
FT Money considers the lessons taxpayers and the authorities need to learn from an episode when tax went horribly wrong and what lies ahead for those affected.
Aftermath of a scandal
Following a review last year led by Sir Amyas Morse, former head of the National Audit Office, the government made several changes to the loan charge (see box), which caused some — including FT readers — to express anger that scheme users had “got away with it”.
The reality is not so clear-cut (see spider diagram). Some who used the schemes before 2010 but were not challenged by HMRC have nothing to pay. However, anyone who did so after 2010 — and whom HMRC opened inquiries into — faces the loan charge.
Even in the scenario where a person might be said to have walked away unscathed — when the loan charge no longer applies and there is no inquiry open on any of their years — individuals remain at the mercy of those managing the trust that paid out the loans. Tax advisers said several trusts have started to call in the loans, normally at a discount, potentially triggering a taxable event for the person who received the money. In this situation, individuals would still face a large tax bill plus repaying some or possibly all of the money received.
“Someone you have no control over could wake up one day and with a pen stroke create a tax liability for you,” warns Dominic Arnold, partner in tax dispute resolution at BDO.
Meanwhile, campaigners and some tax advisers are critical of the way the conclusions of last year’s government review have been implemented, reporting long delays in settlement, mistaken or unreasonable liability calculations and a lack of communication from HMRC. As the September deadline looms, thousands fear they will be unable to complete their settlement with HMRC.
Tom Wallace, head of tax at WTT Consulting, which represents 2,000 of those affected by the crackdown, says about 60 per cent of his clients, who want to settle, have still not received liability calculations from HMRC. When these are received, they are often wrong, he adds — citing one client who was sent what he calls a “completely spurious” figure of £200m.
Mr Taylor echoes this experience. His settlement has dragged on because he believes the liability figure presented to him is unfair. It includes £30,000 of interest, which he thinks he should not have to pay, pointing to HMRC delays. The authority has offered him a time-to-pay arrangement of £8,000 a month for two years, even though he is not currently working and cannot afford this. But paying the loan charge would bankrupt him, he claims, threatening his livelihood, since most contracts for agency pilots stipulate they cannot be bankrupts.
Lisa Vanderheide, tax director at law firm Stewarts, says many of her clients who used loan schemes are in a similar position. One of her clients had an open inquiry from HMRC that was not progressed for seven years. The individual received an apology from HMRC that nothing had been done on the case due to constrained resources. However, when Ms Vanderheide asked for the interest to be mitigated, the tax office refused.
She has also found getting HMRC to agree that a client disclosed their involvement in the schemes on tax returns is “virtually impossible”.
“They will always say what they put on the tax return wasn’t enough for [HMRC] to realise what was going on,” she adds. “I’m not convinced that’s in the spirit of the Morse review.”
The government told FT Money that the loan charge had been introduced to ensure that people who used the schemes “contributed their fair share of tax”. Nevertheless, it had acknowledged the concerns raised about the policy and implemented the review recommendations, at an estimated cost of £745m.
On the issue of disclosure, the government said individuals would need to have provided the loan amount, specified to whom it was made, the arrangements under which the loans were made and the tax avoided, before HMRC considered their disclosure reasonable. The inclusion of a scheme’s HMRC registration number on tax returns “cannot reasonably or lawfully be described as ‘reasonable disclosure’,” it added.
The government also rejected claims that HMRC had not done enough to process settlement claims quickly enough ahead of the September deadline. It said that since April HMRC had issued more than 10,000 letters to those who chose to settle by April 2019 and responded to more than 35,000 items of related correspondence between October 2019 and June 2020. HMRC has promised people who meet the time limits set out in its letters will be able to conclude settlement by September.
Various support measures are available for those affected. People who “do not have disposable assets” and earn less than £50,000 have a minimum five years to pay, with those earning less than £30,000 given at least seven years. Meanwhile, anyone earning more than £50,000 can be given longer to pay if they contact HMRC. The government stresses there is no maximum time limit on repayments and that no one will need to pay more than 50 per cent of their disposable income, unless they have a “very high” disposable income.
HMRC has said repeatedly that bankruptcy will be a last resort and it “will not force anyone to sell their primary home to pay for their loan charge or disguised remuneration debts”. However, critics point out this does not limit other parties acting on HMRC’s direction.
“HMRC has never been able to force the sale of a home but instead has the ability to petition for bankruptcy,” says Mr Wallace. “Should that happen, then the appointed bankruptcy trustee has an obligation to liquidate assets, including the family home.”
The legacy of the loan charge
MPs are pressing the Treasury to agree new settlement terms which would see scheme users pay a flat rate of 10 per cent on loans received, in return for closure of their tax position. It is also calling for an extension to the September deadline to January 2021, arguing that Covid-19 has delayed settlement with HMRC and caused increased hardship.
Campaigners say further changes to legislation are unlikely. Instead they have pinned their hopes on a number of judicial reviews currently in the pipeline.
Lord Forsyth, the Conservative chair of the Lords Economic Committee and a critic of the loan charge, believes it is unlikely the Treasury will agree new concessions given the considerable sums already spent. Nevertheless, he says his committee will continue to probe the policy’s impact.
One of the “most disappointing” legacies of the loan charge affair, he says, is the treatment of avoidance scheme developers.
“They seem to have got off scot-free,” he says. “[The authorities] have not done enough on the people running these schemes trapping people into tax avoidance . . . That to me is where the real felony lies.”
Indeed, people facing the loan charge are being preyed on by scheme operators to join new arrangements which spuriously claim to be able to avoid the loan charge. HMRC has already warned these are “unlikely to work” and has raised awareness of new avoidance schemes targeting those returning to the NHS from retirement.
The tax authority is conducting consultations on tackling promoters of avoidance schemes, including “disguised remuneration” operations. MPs on another cross-party group, focused on anti-corruption and responsible tax, are also pledging to improve legislation in this space. But progress is worryingly slow.
“I really wish I could warn the new people who are signing up to these,” says Molly Thomson, the wife of an IT contractor who faces a six-figure bill for his use of loan schemes. (Her name has been changed at her request.) “If they could know the misery we’re going through.”
The problem arises partly because tax advice is not regulated in the UK. Anyone can set themselves up as a tax adviser. There is no marketwide competency requirement and no obligation to be a member of a professional body. The contractor agency market is likewise unregulated. HMRC recently concluded a consultation on how to improve standards in the tax advice market.
Meanwhile, some experts are warning taxpayers of increased use of retrospective law. Keith Gordon, a barrister at Temple Tax Chambers, fears the “genie is out of the bottle” in this area.
He cites recent changes to entrepreneur’s relief, which limited the lifetime relief available from £10m to £1m. While the changes came into effect on Budget day on March 11, so-called “anti-forestalling” measures contained in the legislation could affect transactions between April 6 2019 and March 11 2020. So, transactions agreed before the changes could be subject to the lower lifetime limit of £1m.
“The law — particularly tax law — depends on certainty and the idea that the law can be changed on a whim is a very worrying development,” Mr Gordon says.
The Treasury and HMRC reject the charge that the loan charge is retrospective — citing the fact that the policy was first announced in the 2016 Budget, three years before it took effect. And some experts agree it is unreasonable to expect the government never to be able to make backward-looking changes.
“The idea that [retrospection] is some inviolable principle that is now being breached and all the gates are open is complete nonsense,” says John Cullinane, tax policy director at the Chartered Institute of Taxation.
Instead, Parliament and the tax authorities should weigh up when it is permissible to limit the certainty taxpayers are entitled to expect and take responsibility for that, he argues.
“It was at the extreme end to have retroactive action going back 20 years,” Mr Cullinane acknowledges. “But why did elected representatives vote for such an extreme thing? And then when surprised by the reaction, [why did they] not have the honesty to learn from it rather than slag off the officials who had implemented what they’d decided?”
The political and logistical difficulties caused for the Treasury and HMRC by the loan charge mean they are unlikely to want to repeat the experience, he says. It is also likely to make politicians and the government think twice about legislating similar backwards-looking tax policy, adds Lord Forsyth.
“To be fair to the Treasury and HMRC, the loan charge went through the House of Commons in a matter of hours [when first legislated for in 2017],” he says.
However, this is little comfort to the people caught by the current crackdown. Ms Thomson says that since she and her husband found out about his liability two years ago, they have felt “immense pressure, anxiety and despair on a daily basis”. The couple have discussed divorce, bankruptcy and even suicide. “There is no certainty in anything any more,” she says. “We cannot plan, we cannot prepare, we have no idea how we will cope if this is allowed to continue as it stands.”
“This is a situation where there really aren’t any winners,” adds George Bull of RSM, an advisory firm. “Never again should we have 20 years of uncertainty on tax matters.”
The loan charge: a recap
The loan charge was announced in the 2016 Budget, to come into effect in 2019.
The anti-avoidance measure was designed to address the tax lost to the exchequer from various “disguised remuneration” schemes — which avoided income tax and national insurance by paying people in loans not intended to be repaid.
The policy required about 50,000 people who had used the schemes to settle their debts with HM Revenue & Customs before April 5 2019 or face the charge — and pay tax on up to 20 years of income in the 2018-19 financial year.
Following an outcry from MPs, peers, professional bodies and campaigners over the extreme distress the policy was causing — including several reported suicides — the government commissioned an independent review in September 2019.
Led by Sir Amyas Morse, former head of the National Audit Office, the review concluded the loan charge had failed to “get the balance right between tackling tax avoidance and protecting the rights of taxpayers”.
He made 19 recommendations — all but one of which was accepted by the government. The key changes include:
The loan charge no longer applies to loans entered into as far back as April 1999 — instead it only applies on loans after December 9 2010, as Sir Amyas argued the law was “not clear” before 2010.
The loan charge no longer applies to loans entered into after December 2010 and up to April 6 2016 where a “reasonable disclosure” of the scheme was made to HMRC and the authority did not take action.
Rather than needing to pay the loan charge all in one tax year, people can spread it evenly across three tax years: 2018-19, 2019-20 and 2020-21.
30 September deadline:
Those affected need to file their 2018-19 self-assessment tax return by September 30 2020, reporting any loan balances subject to the loan charge.
Individuals who are not settling, and therefore become liable to pay the loan charge, will need to pay the charge that is due on September 30 or agree a so-called “time to pay” arrangement with HMRC before then.