The introduction of HMRC‘s controversial loan charge on 5 April 2019 leaves up to 50,000 contractors (mainly working in business services), who received remuneration from their employers paid as a loan (thereby avoiding income tax) since April 1999, with a large debt to satisfy to HMRC. HMRC expects to recoup a staggering £3.2 billion in tax from its loan charge demands.
Despite it being antithetical to the rule of law to apply huge retrospective tax charges to schemes undertaken by ordinary contractual workers (and not super rich tax avoiders) who were mis-led by promoters of EBTs, if an individual is not able to repay the original loan, agree a settlement with HMRC or pay the loan charge, it is inevitable that bankruptcy petitions served by HMRC will increase.
What is the loan charge?
The loan charge is a charge introduced by HMRC to employees that received income by way of loan – in disguised remuneration schemes to avoid income tax liability – that have disguised remuneration loans outstanding on 5 April 2019.
The loan charge will apply to outstanding loans i.e. it will not apply to those loans that are paid back.
The average amount of tax avoided per person was in the region of £20,000 per annum, with a large proportion of those using a disguised remuneration scheme doing so for more than 1 year. The sums involved clearly leaves at least 50,000 people facing a significant tax bill which could force many into bankruptcy.
How do loan schemes work?
Employees and contractors who partook in these schemes received salary by way of a loan instead of in the usual way. However, these “loans” did not have the effect of a typical loan in that there was a mutual understanding that they did not have to be repaid and there was little to no interest required in consideration.
A common example would be the utilisation of the employee benefit trust (EBT). Typically, a contractor would be employed on a short term contract and would have been advised by an accountant or financial adviser to use an EBT set up by a specialist company. The wage for the employee would not be paid to the individual’s designated personal bank account (as would be normal in employer-employee remuneration) but to the EBT which would then transfer the funds (minus its’ own transaction fees) to the employee. No tax (particularly Income Tax and National Insurance Contributions) would be paid by the employee.
Who is affected by the loan charge?
Evidently, PAYE workers will not be affected by the loan charge given that it is likely they have received payment from their employer in the usual way.
According to HMRC, the loan charge is likely to apply to an estimated 50,000 employees, mostly contractors working in business services such as financial advisers, management consultants and IT consultants. NHS Contractors will also be hit with a large bill.
Risk of potential bankruptcy petitions from HMRC
MPs have raised concerns in Parliament on behalf of loan charge workers, with the cross-party consensus being that it is antithetical to the rule of law to apply huge retrospective tax charges to schemes undertaken by workers who were mis-led by promoters of EBTs.
Many people across the country would have now received letters from HMRC levying huge loan charges, which if not settled to the satisfaction of the Treasury, will inevitably lead to people either declaring bankruptcy or being forced into it by the government.
Instruct Specialist Bankruptcy Petition Lawyers
Anyone who is (or suspects they are) part of a disguised remuneration scheme, should seek legal advice as soon as possible from our tax team. If a tax debt is owed, you are at risk of HMRC serving a statutory demand immediately and issuing bankruptcy proceedings against you. If insolvency proceedings have started (or you suspect will start against you if you owe money to HMRC), you should contact us as leading bankruptcy solicitors as soon as possible for independent legal advice. Our bankruptcy team (based in Middle Temple Chambers, City of London) works in tandem with our tax disputes and professional negligence team to obtain the optimal result for you.