Economic Affairs Committee Contents

Chapter 4: The 2019 loan charge

53.This chapter deals with evidence received on HMRC’s use of its powers that particularly related to the 2019 loan charge. This was the most frequently raised issue in response to our call for evidence. Not only did the Committee receive a great deal of written evidence on this issue, but we also received a large volume of correspondence. We are grateful to all those who shared their experiences with us.

The loan charge

54.The loan charge is shorthand for the measures introduced by the Finance (No. 2) Act 2017 to combat “disguised remuneration” schemes, a form of tax avoidance. These complex arrangements led to substantial amounts of pay being directed by an employer to an employee benefit trust and paid to the employee by way of a loan. This was intended to avoid tax and National Insurance Contributions (NICs) for the payee, and employers’ NICs for the payer. The schemes were heavily marketed to the self-employed and those with personal service companies, working as contractors. In many cases there was never any expectation of the loan being repaid.

55.Legislation to counter these schemes was first introduced in Finance Act 2011. While the 2011 legislation looked forwards, the 2017 legislation looks backwards, bringing into charge to income tax the value of all loans made under these schemes on or after 6 April 1999 which are outstanding at 5 April 2019. Only if taxpayers agree with HMRC to voluntarily settle tax avoided for all years closed to inquiry since 1999, plus tax and interest for years since then under inquiry, can the charge be avoided.

56.Many of the responses we received were from people who were caught by the loan charge or had clients who were affected. They provided a wealth of evidence about the impact of the charge in practice and what they felt was disproportionate or unfair about the way that HMRC had acted. Further examples can be seen in Appendix 5.

Box 2: The loan charge 2019: a case study

“I have a client who is a social worker. She was made redundant by her local council. … It has a farewell party on the Friday and on the Monday it said “If you join this agency and use the scheme, we will re-engage you as a contractor.”… She … was re-engaged as a contractor for five years … At the end of those five years, the council told her it would re-employ her as an employee, which it did. She was unaware of what was going on. She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it. She is the only worker in that particular house; she has a young child and her spouse stays at home. If she goes bankrupt and it comes up on her next criminal records check, she cannot work. This is not a rich merchant banker who has done something wrong. This is a dedicated social worker. That encapsulates what the loan charge does; it is unfair and pernicious … Yes, my contractor benefitted because she paid less tax. The Revenue was supine and silent and by its silence gave tacit approval to these schemes. In fact, that was used in the schemes’ marketing: no approach from the Revenue meant they were Revenue approved … The county council did not warn her, and the people behind the agency running the scheme, as is usual in these cases, were selective about the information that was made available. You could argue that she should have investigated and should have known more about this, but she is a social worker, she is not a tax expert … How could a social worker be expected to penetrate that type of arrangement? It is just unfair.”

Source: Q 40 (Graham Webber)

57.The loan charge legislation was introduced by the Government and passed by Parliament. HMRC is obliged to implement that legislation, and should therefore not be held wholly responsible for its basic principles. Witnesses were concerned both with the legislation itself, and HMRC’s approach to disguised remuneration schemes more generally.

58.There is some evidence that Parliament did not adequately scrutinise the loan charge. In the Public Bill Committee of the Finance (No. 2) Act 2017, debate consisted of only three contributions—an introduction from the Financial Secretary to the Treasury, a response from the Opposition, and a further response from the Minister. Concerns about retrospection and the impact on individuals were briefly raised by the Opposition, but not followed up by further debate.62

59.Now the loan charge itself is fast approaching, parliamentary awareness has been growing. Stephen Lloyd MP tabled an Early Day Motion on the loan charge on 8 May 2018, which has more than 100 signatures.63 Steve Baker MP secured a Westminster Hall debate on the matter on 20 November 2018, in which more than 25 MPs from different parties raised concerns about the issue.64 Baroness Noakes and Baroness Kramer, both members of our Finance Bill Sub-Committee, raised this issue in the House of Lords on 13 November.65

Issues with the loan charge

60.Many witnesses said they had joined these schemes without being aware of HMRC’s attitude towards them.66 They were assured by their employers or promoters of the schemes that they were effective (sometimes with legal opinions)67 and that HMRC knew about the schemes and approved them. HMRC did not do enough to counter this misinformation. It used its “Spotlight” online guidance publications to make known its views, but this is little read, and one witness said these schemes were not mentioned there until as late as 2016.68 Some interpreted the fact that no action had been taken against these schemes, despite the fact that they may have been disclosed under the Disclosure of Tax Avoidance Scheme Rules (DOTAS), as evidence of HMRC acquiescence.69

61.Many participants told us they declared their involvement in the schemes to HMRC but HMRC did not warn them that it intended to, or was, challenging the schemes. 70 HMRC took a test case (“the Rangers case”71) to challenge the schemes. The first appeal was heard in 2010. It was not until 2017 that the Supreme Court published its judgment in HMRC’s favour. HMRC announced the loan charge legislation in 2016.

62.Some affected witnesses told us that HMRC had raised no enquiries on their tax returns.72 For others, HMRC opened enquiries but did not progress them for long periods of time,73 even when the taxpayers proactively cooperated.74 This has led taxpayers to feel that HMRC was deliberately delaying the conclusion of enquiries.75 Some felt that HMRC is using the loan charge to cover up its own failures to act in a timely manner.76

63.The judgment in the Rangers case found that the loans advanced constituted earnings for tax purposes. Not only was the amount taxable on the employee, but the employer should have applied PAYE.77 The loan charge legislation does not tax the employer, who may be liable for the PAYE under case law, but the recipient of the loan, whether an employee or a contractor. Witnesses told us that many employers had denied workers standard employment contracts but encouraged employees and contractors to use the agencies or companies that promoted such schemes, in some cases as a condition of getting work.78 Individuals said it was unfair that they should bear the loan charge, rather than the organisations which hired them or promoters who had also benefitted by saving employers’ National Insurance contributions or from fees.79 As Keith Gordon said, “the problem is the legislation goes for the person least able to defend him or herself.”80

64.The charge was also considered to be retrospective in its effect,81 because in many cases the tax years it relates to are closed. In normal circumstances HMRC would be unable to reopen these tax years if they could not prove failure to take reasonable care (to go back six years) or fraud (to go back 20 years). The loan charge triggers a charge in 2019/20 on the cumulative loan value advanced since April 1999 and not repaid by April 2019. Witnesses said that no additional income was generated to pay that tax and the whole liability falls in a single year ensuring that much of the tax is payable at higher rates.82

65.Many witnesses were not expecting that they would ever have to repay the loans so made no provision to do so. They now face, in some instances, tax bills of tens of thousands of pounds without the means to pay. For some their circumstances have changed significantly in the meantime with retirement, unemployment, illness or divorce depleting their resources.83

Box 3: Interest and penalties


Late payment interest is chargeable when income tax is not paid by the due date. This is usually 31 January (after the end of the tax year when the liability arose).

The rate varies with market rates; and is calculated as simple interest from the due date until the tax liability is settled.

Where a taxpayer seeks to reach a contract settlement of disguised remuneration tax liabilities in order to avoid a loan charge arising on 6 April 2019, HMRC will require the taxpayer to make a voluntary payment in respect of ‘closed’ tax years. Interest is not chargeable on such voluntary payments


Penalties can arise where a taxpayer has submitted an income tax return containing an ‘inaccuracy’ which leads to an underpayment of the tax liability for the year (unless the taxpayer took reasonable care in completing the return and the ‘inaccuracy’ occurred despite that reasonable care).

What is reasonable care depends on individual factors, such as the taxpayer’s skills and the circumstances and complexity of the issue involved. Where a taxpayer relied on a tax adviser or informed third party in completing a tax return, the fact that the adviser may have been wrong or later proven to be wrong does not generally mean that the taxpayer can be charged a penalty. From late 2017 this has changed where tax avoidance is concerned.

Higher penalties are chargeable if reasonable care was not taken, or the inaccuracy was deliberate. Depending on the particular circumstances, penalties may not be charged by HMRC on settlements for disguised remuneration schemes.

66.The Finance Act 2014 gave HMRC a range of powers to monitor promoters of tax avoidance schemes, publish information about them and ensure their clients are aware of the risks they are running.84 HMRC has also referred advertising by promoters making false claims about loan schemes to the Advertising Standards Authority. HMRC has publicised its success on its “Spotlight” website to deter other promoters of avoidance schemes and to ensure users and potential users understand the consequences of participating in such schemes.

67.HMRC has a range of powers at its disposal to deal with promoters of tax avoidance schemes, but we have seen little evidence of action taken against those who promote disguised remuneration schemes. In the absence of publicised actions, HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable), so it can more easily recover liabilities.

68.We encourage HMRC to do more to publicise any actions it is taking against promoters of disguised remuneration schemes. “Spotlight” publications are neither well-known nor well-read, and are therefore insufficient for this purpose.

The intended target?

69.Most of the evidence we received was from a cohort of taxpayers who could comprise up to 35 per cent of those affected by the loan charge.85 They were generally individual workers, often in the National Health Service or working for local authorities,86 who had been denied the opportunity to enter into a normal employment contract. In seeking work, witnesses told us that the alternative contractor arrangements exposed them to involvement with service providers and promoters of loan schemes.87 If the legality of the tax arrangements was questioned, they were assured that they were legal and approved by HMRC.88 The participation of the employer in payments to these entities may also have provided assurance that they were acceptable. The involvement of an offshore company and loan structure were not always understood. The promoters and administrators of the schemes took fees so the full tax effect was not necessarily visible to or received by the participant.89

70.The individuals affected by the loan charge who gave evidence to this inquiry are very different from those generally perceived to be involved in tax avoidance. While they must accept some responsibility, they are not as culpable as those who are much better off, extensively advised and whose involvement in such schemes may be regarded as more egregious. In many circumstances, individuals were being directed to use these schemes by their employer, who would have been in a better position to determine the consequences for the employee of taking a loan. It is unfortunate that the loan charge does not discriminate for different intents and circumstances.

71.Many witnesses were willing to settle outstanding liabilities in so far as they could.90 Some criticised HMRC’s failure to pursue employing companies, who achieved savings through the arrangements, and promoters of the schemes, who some witnesses said misled them.91

72.Several witnesses who did not have means to pay tax bills or settle within a set time (a ‘Time to Pay’ arrangement), often five years, told us they were threatened with bankruptcy.92 Ruth Stanier OBE, Director General for Customer Strategy and Tax Design at HMRC, said that “we [HMRC] have also been clear that we will look at each case on its merits. There is no maximum or minimum period within which an overall settlement period can be agreed.”93 She did not have information on how many had settled on longer terms.94 In relation to threats of bankruptcy she said, “Making people bankrupt does not help us to collect the revenue.”95

73.HMRC told us that it was assessing the evidence we received.96 In relation to those settling liabilities for earlier years in order to avoid paying the loan charge, Ruth Stanier said that “we are not currently in a position to provide a detailed breakdown of income distribution across different groups.”97 However of the 5,000 settled cases to date (out of the 50,000 expected), 25 per cent were with employers and 75 per cent individuals. The average settlement for an employer was £525,000, compared to £23,000 for individuals. No details were given on the cases not yet settled.98

74.The consequential impact of the loan charge and HMRC’s handling of it for taxpayers such as the cohort described above has been devastating. Ruth Stanier commented “we will deal with cases appropriately and sympathetically”99 but this was not the experience of many witnesses. Suicidal feelings were reported. One witness called their situation “a living hell”.100

75.Disguised remuneration schemes are an example of unacceptable tax avoidance that HMRC is right to pursue. All individuals using these schemes must accept some degree of culpability for placing an unfair burden on other taxpayers.

76.The loan charge is, however, retrospective in its effect. Parliament has laid down time limits for tax matters of four, six and 20 years which give certainty to taxpayers about their affairs. It undermines this framework to artificially trigger a future charge.

77.In its retrospective effect, and its failure to pursue taxpayers proportionately to their circumstances, HMRC’s approach to the loan charge diverges substantially from the principles in the Powers Review.

78.We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been “closed”.

79.We were disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy, where individuals clearly have no assets to settle liabilities. Whether these threats were explicit or perceived, they have caused considerable anguish for a number of individuals.

80.We recommend HMRC urgently reviews all loan charge cases where the only remaining consideration is the individual’s ability to pay. We also recommend that HMRC establishes a dedicated helpline to give those affected by the loan charge advice and support. Such action should take place well in advance of the loan charge coming into effect in April 2019.

81.HMRC failed to make its position on the schemes clear enough. We do not consider a notice in “Spotlight” on a website sufficient when in many cases HMRC knew which taxpayers and employers were using the schemes and could have communicated with them directly. There were unreasonable delays in legislating and in failing to progress those enquiries which were opened into individuals’ tax affairs, depriving them of certainty even in situations where they were actively seeking to engage with HMRC to finalise matters.

82.HMRC failed to communicate effectively with some users of such schemes on a timely basis as its approach to tackling disguised remuneration schemes evolved from the first disclosure of the schemes after the disclosure regime was introduced in 2004, to legislation in 2011 and through the judicial process ending in 2017.

83.To avoid the delay and uncertainty that has accompanied HMRC’s approach to disguised remuneration schemes, we recommend that HMRC makes a declaration, in a clear and accessible public statement, as soon as it begins investigating a potential tax avoidance scheme. Such a declaration should be targeted at those most likely to be affected by the scheme in question. Publishing online guidance, such as through “Spotlight”, will not be sufficient.

84.HMRC should also notify a taxpayer that it is investigating an avoidance scheme as soon as possible if that individual declares the scheme on their tax return.

62 Public Bill Committee on the Finance (No 2) Bill 2017–19, 19 October 2017, col 100

63 Early Day Motion 1239 [accessed 27 November 2018]

64 HC Deb, 20 November 2018, col 270WH

65 HL Deb, 13 November 2018, col 1853–1868

66 Written evidence from Anonymous (DFC0011), Gareth Parris (DFC0020), and Helen Fernandez (DFC0047)

67 Written evidence from Anonymous (DFC0032)

68 Written evidence from Anonymous (DFC0092)

69 Written evidence from Robert Randall (DFC0006), Chris Rooks (DFC0014), Sabina Mangosi (DFC0015), Gareth Parris (DFC0020) and Dale Rayment (DFC0049)

70 Written evidence from Chris Rooks (DFC0014), Loan Charge Action Group (DFC0060) and Gareth Parris (DFC0020)

71 RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) 2017 UKSC 45

72 Written evidence from Robert Randall (DFC0006)

73 Written evidence from Loan Charge Action Group (DFC0060) and Anonymous (DFC0083)

74 Written evidence from Jay Kohn (DFC0012)

75 Private roundtable discussion (Appendix 3), Written evidence from Anonymous (DFC0037)

76 Written evidence from Chris Rooks (DFC0013), Q 40 (Keith Gordon)

77 RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) 2017 UKSC 45

78 Written evidence from Sabina Mangosi (DFC0015) and Loan Charge Action Group (DFC0060)

79 Written evidence from Chris Rooks (DFC0014), Sabina Mangosi (DFC0015), Helen Fernandez (DFC0047) and Anonymous (DFC0063)

80 Q 40 (Keith Gordon)

81 Written evidence from Gareth Parris (DFC0020), Loan Charge Action Group (DFC0060), Anonymous (DFC0083) and Bev Jackson (DFC0056)

82 Written evidence from Dale Rayment (DFC0049)

83 Written evidence from Chris Rooks (DFC0014), Sabina Mangosi (DFC0015), and Helen Fernandez (DFC0047)

84 Finance Act 2014, sections 234–283

85 Q 54 (Ruth Stanier)

86 Written evidence from Dale Rayment (DFC0049), Loan Charge Action Group (DFC0060), Anonymous (DFC0065), and Anonymous (DFC0092)

87 Written evidence from Sabina Mangosi (DFC0015); Q 40 (Graham Webber)

88 Written evidence from Anonymous (DFC0011), Jay Kohn (DFC0012), Chris Rooks (DFC0014), Sabina Mangosi (DFC0015), Anonymous (DFC0032), Dale Rayment (DFC0049), Bev Jackson (DFC0056), Anonymous (DFC0065), and Anonymous (DFC0083)

89 Written evidence from Richard Hedgecock (DFC0057)

90 Written evidence from Robert Randall (DFC0006), Jay Kohn (DFC0011)

91 Written evidence from Sally (DFC0096)

92 Written evidence from Chris Rooks (DFC0014), Sabina Mangosi (DFC0015), Dale Rayment (DFC0049), and Loan Charge Action Group (DFC0060)

93 Q 54 (Ruth Stanier)

94 Ibid.

95 Ibid.

96 Letter from Ruth Stanier to the Chairman, 31 October 2018: 31 Oct Stanier to Chairman letter .pdf

97 Ibid.

98 Letter from Ruth Stanier to the Chairman, 5 November 2018: from Ruth Stanier to the Chairman 051118.PDF

99 Q 55 (Ruth Stanier)

100 Written evidence from Sally (DFC0096)

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