‍In the beginning

‍

The loan charge is perhaps one of the most controversial tax measures of the past two decades. Its original form was interrupted by a General Election; delayed; reintroduced in a slightly different form; reviewed internally by HMRC with no alterations; subject to an “independent” review widely seen as having been manipulated by HMRC; spawned an All-Party Parliamentary Group; been voted in Parliament as being “not the will of the lawmakers”; reviewed again in 2025; caused HM Treasury to apologise to taxpayers for HMRC errors of policy and execution; currently subject to a settlement opportunity which – for the reasons below – we consider to be unfair.

‍

So how did we get here and where are we going?

‍

IR35 and all that

‍

Contractors are independent workers setting their own terms and conditions of working. Except when the facts point toward their actually being employees of the paying end client in all but title.

‍

In April 2000 HMRC persuaded Government that tax was being lost because many contractors were claiming to be self-employed or engaged via their own company (PSC) when in “fact” they should be employees subject to PAYE deductions on all payments made to them. Legislation was introduced.

‍

These “off-payroll” laws are commonly known as IR35. (Named after the press release accompanying the Budget of 1999).

‍

Broadly, these rules laid down conditions under which a contractor could be regarded as a “disguised employee” and therefore any payments made to him/her would be “disguised remuneration”. If that was the case, then deductions equivalent to those for an employee subject to PAYE should be paid to HMRC by the “employer”.

‍

The rise of the schemes

‍

Many contractors rearranged their payment arrangements by setting up a company to act as intermediary. These “PSCs” would contract with an end client or agency, invoice for the time of their owner and subsequently distribute funds in as tax-efficient a manner as possible – usually via dividends.

‍

Setting up and maintaining a company is an administrative burden. It incurs fees. It increases tax filings and creates corporation tax liabilities. It probably means AVT returns as well.

‍

Tax planners spotted an opportunity. What if, instead of a company, payments from end clients could be passed through a single conduit and then separated into “taxable” and “non-taxable” elements?

‍

The first such arrangements (or schemes as HMRC prefers) appeared in 2002. There is no evidence that HMRC recognised the potential threat of such schemes at that time.

‍

The numbers of contractors who were convinced to abandon their clumsy PSCs and join a scheme rapidly increased. The initial schemes were quickly copied and by 2008 there were probably tens of thousands of contractors using schemes. WTT has details of perhaps 35 schemes that came into existence between 2002 and 2008.

‍

The promotion and marketing of these schemes sees an unholy mix of legal analysis and creative alchemy. It was claimed that the schemes removed the burden of running your own company but retained the differential in “take-home” pay that using a PSC allowed. The implication was that the difference between the invoiced time and the amount appearing in a bank account (initially at least circa 20% of gross invoiced value) was paid away in tax.

‍

That was untrue. A careful and pedantic reading of the marketing materials would have revealed that in most cases. (There are instances of outright lies being told on this point).

‍

The reality is that perhaps 2% of the difference was paid away in tax and the rest enriched the promoters.

‍

WTT has no accurate numbers for the gross benefit to promoters in this period but would estimate a value of over £200m.

‍

This is money that HMRC would certainly have had a good claim to be paid except for the fact that they were either unaware of (hard to believe) or failed to understand and recognise the risk (much easier to believe).

‍

The fightback begins

‍

It is a fact that HMRC was investigating in the early/mid-2000s at least one of the disguised remuneration (a phrase not in use at the time but later enshrined) schemes. In 2008 HMRC persuaded HMG that retrospective tax law was required to bring to an end a scheme designed, marketed, facilitated and profited from by the Montpelier Group in the Isle of Man. This was known as the “DTA Scheme”.

‍

Despite the scheme promoter dismissing the flood of enquiry notices to the scheme users, from HMRC, as “routine” or “without merit”, after a protracted series of cases that went to the tax Tribunals, in early 2016 the retrospective rules were deemed to apply.

‍

(There remain outstanding tax issues for some users of this DTA scheme which have yet to finish their journey through the Tribunals in 2026).

‍

There is scant evidence of any coordinated HMRC activity on other schemes. The pattern of enquiry notices being issued is inconsistent and haphazard.

‍

Clearly however HMRC was waking up to the growing number of users of schemes and consequently the potential tax loss. Unfortunately their chosen strategy to stem the tax loss was flawed from the very beginning.

‍

The legislation HMRC brought into existence via an announcement from the then Government on 9 December 2010 (legislation took another six months to be produced) highlighted a fundamental fault in HMRC’s thinking.

‍

The legislation that eventually appeared in Part 7A ITEPA 2003 sets up terms and conditions as to when a payment made from employer to employee (don’t forget that HMRC claim the individual is a “disguised employee”) should be subject to tax. The tax in question is income tax due on employment income. That tax is usually collected via the PAYE system by the employer.

‍

Simple enough therefore to allow HMRC to go after the employers and promoters (de facto employers) for lost PAYE?

‍

No. HMRC presumably thought at the time as they do now. That is that despite registering offshore promoters and employers for a PAYE scheme (allowing them to claim legitimacy for their avoidance scheme), in fact HMRC has no legal route to enforcing payment.

‍

Instead the powers in Part 7A – the so-called “disguised remuneration” rules – would be turned against users of schemes whether they had been aware of the tax avoidance aspects or not.

‍

And continues – with prejudice

‍

Evidence presented by HMRC to the second of the reviews (Morse) on the loan charge suggests that once the 2010 legislation was in place, the agency considered that the job was done. Their position was “clear”. The legislation was “clear”. That was far from the case. Even today in early 2026 there are cases in the Tribunal continuing to argue over the interpretation.

‍

For whatever reason however, although the issue of enquiry notices seemed to increase, the proliferation of new schemes after 2010 was significantly increased. Some of these were crudely modified schemes from before 2010 – what HMRC would call the “pre-DR” era. Some were brand new.

‍

Far from curbing the number of contractors tempted by the schemes, indications are that the number of individuals increased.

‍

So apparently did HMRC’s awareness and the gaps in their enquiry coverage became obvious. Many individuals did not have enquiry notices issued to them within the statutory periods permitted (a taxpayer protection against HMRC’s potentially unlimited powers).

‍

Simultaneously HMRC took no action to limit or restrict the ability of offshore parties to register for PAYE schemes; took no action against promoters going out of corporate existence with huge potential tax liabilities; took no action to protect the UK taxpayer against the loss of tax via the promoters.

‍

By 2016 it was obvious that HMRC was facing a huge financial loss exacerbated by a number of strategic and tactical mistakes which allowed those most likely to be liable to the tax to effectively disappear. Further, the recipients of money (the contractors) had a far from universal or consistent (fair?) liability to potentially pay that tax due to the lack of enquiry notices or discovery assessments.

‍

The answer?

‍

A tax charge in 2019 which would sweep up all the “untaxed” payments made to contractors between 1999 and 2019.

‍

This would be achieved by the “simple” expedient of aggregating all those untaxed payments and adding them to the 2018/19 income of contractors.

‍

This was soon christened the “loan charge”.

‍

The loan charge

‍

Perhaps the most controversial tax charge ever.

‍

It has spawned three reviews; allegations of cover-ups and manipulation of evidence; the creation of an All-Party Parliamentary Group; an apology from Government for the actions and behaviour of HMRC; and eventually a settlement proposal.

‍

The first review was internal, concluded very quickly with “no alterations needed”.

‍

The second by (now) Lord Morse was longer, more comprehensive and led to real change. The most significant was that the period over which loans could be aggregated would no longer begin in 1999 but rather after the legislation 2010 was announced. The rationale being that until then, HMRC’s position was “not clear”.

‍

The third by Ray McCann was deliberately limited to the remaining loan charge period (December 2010 to April 2019) and was to provide a means by which taxpayers could settle their loan charge liabilities.

‍

The very strict limitations to the terms of reference for Mr McCann prevented a full reckoning of errors pre and post that period from being included and in so doing has prejudiced the chances of arriving at a “fair” settlement.

‍

Nonetheless a settlement position has been proposed, limited as it is, and in the next in this series, I will examine the positive and negative and unknown aspects of this proposal and the practical impact of each.

‍

It is important to say here (early March 2026) that the legislation enabling the proposed settlement is not yet published (or perhaps even written) and things may yet change – hopefully for the better.

‍

‍

Author: Graham Webber - Director of Tax