Where are we now

1999. Yes! over 20 years ago; the government brought in IR35 to tackle the “Next day contractor” phenomenon where companies transferred people from an employee to a contractor overnight as there was no employer NI for contractors. IR35’s rules to identify these “disguised employees” were ambiguous carrying an onerous overhead and high penalty payable by the contractor which could be over 6 years plus if HMRC/case Law determined a different interpretation. Agents and Clients generally ignored the rulings, contractors worked hard to persuade the agents to work on their contracts, many compromising with “IR35 friendly” contracts which conformed to varying levels, also including passing down the liabilities to the contractor. The rest of IR35 is on-going history!! But there were some unintended consequences…..

Some, in the thriving ecosystem of employment umbrellas, identified the demand for reduced bureaucracy and “certainty” in tax within the freelance community. They offered solutions which retained net incomes while removing the IR35 aspect, claiming similar solutions had been in use for years, with approvals by UK Tax Authorities, Queen’s Counsel and the top tax and accountancy firms in the country. Often the employment was in offshore companies so they did not have the overhead of the UK employment law. Employment umbrellas are still being actively encouraged by the HMRC. The use of these (loan) employment umbrellas were actively marketed and became widespread across the freelance communities.

In 2004 a legal requirement was introduced for companies offering “disguised renumeration” to register; HMRC provided them with a Disclosure of Tax Avoidance Schemes (DOTAS) reference which needed to be disclosed on all participants self-assessment form.

In 2010 the Treasury refined the tax rules to tighten the definition and officially introduced the term “Disguised Remuneration”.

For many, the direct reference of the legislation to such schemes appeared to legitimise their use, as a known quantity that HMRC were aware of, and employment umbrellas were quick to assert that their schemes fell outside these rules.

There were legal cases, but while elements were clarified, the variations of schemes made applying precedence across the entire community difficult.

Thus in 2016 legislation was introduced within the Finance Act to incur a one-off loan charge for DOTAS umbrella users. This act is generally taken as a Treasury document and not as scrutinised, many MP’s unaware of the real impacts.

In 2017, following the Rangers legal case (where the judgement was that the company was responsible!). With many (loan) umbrella companies already closed and/or company tax notification periods expired, the Finance Act was amended, extending the rules to all “loans” regardless of DOTAS, and making the employee culpable for the tax if the HMRC was “reasonably” not able to recover the money from the company.

Until 2016, few queries were raised and tax was actually rebated to some. Some received letters to “retain the tax year as open” while the HMRC completed checks. The companies confirmed it was standard process while the DOTAS status was established. Even where the enquiries were received, they have been left open for years without details or questions, some still over a decade later have not been followed up.

Throughout the period and to this day, promotors continued to sell “solutions” claiming they are legitimate and outside the various legislation. Some were so convinced that with hundreds of customers, they supported legal challenges in the courts against the HMRC, with varying success.

2018 Stephen Lloyd MP tabled a working day motion, with 155 MPs signing, forcing a debate in the house of commons.

2019 The House of Lords debated the Loan Charge and sent questions back to the commons.

The working day motion was debated in the house of commons, many LCAG members lobbied their MP’s and marched on parliament. The treasury refused to reconsider despite the massive support for review by MP’s.

2019 Sir Amyas Morse was asked by the government to review the loan charge but within a very narrow focus; the reports publication was delayed due to the late 2019 elections, leaving contractors across the country up to a couple of weeks before Christmas, thinking that by the end of the next month they would have to have settled everything in one lump sum, so irreversible decisions had already been enacted e.g. selling the family home, and sadly some had worked out the could not pay it and there were suicides. The review resulted in the retrospective element being reduced to loans from 9th Dec 2010 onwards, and spreading payment across three years.

2020 The creation of the APPG to challenge only the “part” removal of the retrospective aspect of the legislation rather than it being effective as of the date it was first brought into legislation i.e. 5th April 2016.

      1. ..and the Government’s argument?

The government made an assessment many years ago and are not changing. The LCAG have compiled a useful set of responses to these to defend the individuals’ position. Some of their main points are;

The schemes “never worked”. However, technically they are Legal, they just are not in tune with the way Parliament intended.

  • If it had not been what the Parliament intended, why have so few cases taken to Court found in favour of the individual, and why the need to change the rules after these cases?
  • If tax had been due why the need for new legislation and then refinements to legislation and use of “exceptions” in the tax system

The tax was always due.

  • If it was due, it was due from the companies as per the High Court judgement in the Rangers case, not the individual
  • If it was due, why were proceedings not taken years ago to collect it
  • If it had been collected at the time, people would not have used them and certainly not serially, up to 10 years of allowances would have been applied, not one, and people were in a position to compensate in increasing their rates, planning their finances differently, and certainly not paying for what seems to have gone in commission and fees not taxes.

£3.2 billion was estimated to be recoverable when the rules included loans back to 1999, mainly from companies.

  • The basis of this figure is unclear, whether it includes;
    • Removing the costs to pursue, the lost tax take e.g. by disrupting workers lives and hence future ability to support the economy
    • Loss to the exchequer; many have received demands far in excess of their actual loans, if these were the figures used then it is of little value.
  • The companies have disappeared without HMRC having made tax claims within the statutory period
  • The companies are not around this late in the day either to pay anything, or confirm the basis of their accounting, loans/amounts.

The tax is not retrospective, but retro-active as it is a new tax referring to a current status, it is just this status was achieved in the past

  • early responses on the consultation advised they were indistinguishable (see “retrospective vs. retroactive” in Useful Links below).
  • The status once achieved, could for many effectively be irreversible (for various reasons)
  • The arguments from the government have overlooked one of the chancellors implementing it, own speech “he (taxpayer) is entitled to be protected from retrospective or retroactive legislation” see Useful links below “Philip Hammond Speech 2005”