Death and Taxes

We all know the Benjamin Franklin quote, in this world nothing can be said to be certain, except death and taxes. What we didn’t realise is that one day they may come hand in hand.

I’ve been taking hundreds of calls from members of the contractor community of late. They are distressed, worried, panicked and upset. They have, in many instances, only just realised that the HMRC loan charge of April 2019 is going to affect them. I’ve lost count of how many have said they will have to sell their home, many have broken down and cried to me on the phone. Most worrying and depressingly of all, I’ve lost count of how many have mentioned to me that they have considered suicide.

This is now becoming literally existential: They tell me that everything they built up in their lives is being ripped away. Families broken, houses lost, retirement no longer possible. All whilst HMRC firmly stand by their initial impact assessment which states “This measure is not expected to have a material impact on family formation, stability or breakdown”

I strongly suspect my client (who asked me to mention this) who has just been released from hospital following a suicide attempt, which he states is a direct result of his dealings with HMRC, would disagree with such statement.

Why is all of this happening to such extremity? The answer is “retrospective taxation”.

The definition of retrospective taxation is, according to the Chartered Institute of Taxation is “legislation that is retrospective in the full sense of the term, in that the legislation imposes (or increases) a tax charge on income earned, gains realised or transactions concluded at a time before the legislation was announced’


In past years many businesses undertook tax planning which involved paying employees via a third party loan, often extended via an Employee Benefit Trust (“EBT”)

In short, this meant the following occurred

– Employer pays into an EBT and receives a deduction

– The EBT makes a loan to the employee which was not taxable (as loans are not classed as income as in theory they are to be repaid).

However, part 7a of ITEPA 2003, introduced in the Finance Act of 2011, treats these ‘loans’ as being subject to tax when they are made due to a working relationship.

The above steps, if undertaken before the new rules were announced in December 2010, were not ‘caught’ by the new rules which meant that existing schemes with loans not repaid were effectively OK. However the 2017 Finance Bill introduced the 2019 Loan Charge(“LC”) and with that, all of a sudden, a new piece of legislation with 20 years of backwards looking, devastating impact.

The idea of the legislation was to prompt those in receipt of these loans to repay them to effectively show that they were not disguised remuneration. To apply the charge it must be determined that the arrangement (i.e. EBT or other), involved a third party and was set up with the intention of benefitting an employee.

The loan amount charged is based on the amount extended as loan minus any repayments. Any repayments must be in cash only.

The most newsworthy part of the new rules is perhaps that the LC will also apply to all loans where they were made on or after 6 April 1999, and where the loan is still outstanding at 5 April 2019. So it’s a charge on the amount held on April 2019 which HMRC state is the date the amount borrowed and not repaid crystallises. It’s worth noting at this stage that no actual transaction on this date occurs. It’s purely in the minds of HMRC that this step occurs.

It is this part that has caused many people to state that this is retrospective taxation on the basis that HMRC are bringing in a new rule, yet it applies for the best part of the previous 20 years.

The counter argument to this being that the beneficiaries are able to avoid the LC being applied by repaying the loan in full before the LC date of April 2019. It is therefore a charge at a future date, which the taxpayer can take action to avoid, which clearly can’t be done for historic tax issues.


Mr X receives, via a third party ‘loan’ in the year 2005. In reality he knows this loan will never be recalled so uses it as salary. No tax is paid however as its classed as a loan. Only two actions ever occur, the first being the money getting placed into the trust. The second being the money being passed to Mr X.

HMRC say the schemes ‘never worked’. They further state DR schemes are, and were always, tax avoidance. They use contrived transactions to bend the rules of the tax system to gain a tax advantage that Parliament never intended. In reality, the individual will never repay the loan from the third party so it is no different to normal income and is taxable. HMRC has repeatedly been clear in its view that these schemes do not work, and has consistently challenged them.

Nothing to complain at there, all very clear that HMRC state they were never loans and therefore always in reality, income. Fair enough, that is of course HMRCs job and I applaud them for their consistent efforts to clamp down on avoidance.

However, this means that the two transactions must be considered as the point where the amount became chargeable to tax.’ Earned income’ of course becoming chargeable at the point of being made available (or at point of expectation if earlier), so in this instance, the point when the money is paid to the trust.

It is at this time the income is, in the eyes of HMRC, in reality taxable income. Neither of the two transactions can be said to be of the nature to transform this income to a loan (or vice versa). Therefore, from the point of payment until the point of April 2019 nothing, from a tax perspective, occurs. So for all of that time the money remains as income.

This means it was income which arose before the legislation, which as shown is defined by CIOT as the very definition of retrospective taxation.

Alternatively, the money may have always been a loan, but that’s not taxable as such and also, which transaction would have magically transformed it? It cannot be the 2nd one as that is to the recipient who is being taxed. I repeat, no more transactions occur until April 2019. Therefore, its either been income all this time and is retrospective or, it’s been a loan all this time and is not taxable. Why does it magically transform into income on April 2019? Well it doesn’t and HMRC agree that when they say the scheme never worked. It was therefore always income.

The final possibility is I suppose that the loans were always loans until April 2019. HMRC do of course say that if they are paid back in full before April 2019 the LC will not apply. Furthermore that claim that the amendments to the legislation helps to crystallise the charge at this date. Leaving aside HMRCs magical powers to transfer it into income at that point, if that is the case and its always been a loan until the magical transformation, why on the offered settlement opportunity are HMRC calculating and charging tax from the point of receipt as if it was always income? The answer of course is because ‘the scheme doesn’t work’.

Considering all of this and using HMRCs own descriptions (scheme never worked/interest from point of payment) the only conclusion is that it is income and therefore retrospective.

This brings us to the question of so what? Its only right that these people pay the fair share of tax. I would agree, I firmly believe in the concept of Taxation and its benefits in any well infrastructured society. We also need to recognise in many cases that, despite common mis-belief that we are dealing with the most aggressive type of tax avoider, not everybody who finds themselves affected by the Loan Charge were involved to avoid tax. For many it was the only option if they wished to work and what the structure did do was to comply with IR35 (and given a couple of recent Tribunal cases I’ll tactfully avoid getting into an IR35 discussion right now). Furthermore, in general life we rely on specialists, professionals and those more qualified than ourselves. An I.T contractor for example would take the word of their Accountants or Tax Advisor. They were ‘reliably’ informed that the schemes were QC approved. Whilst nobody can simply pass the blame for their own tax affairs, I think it’s reasonable to state that once a few years has passed without complaint it was completely normal to assume all was ok and to continue. This is why the bills people are now facing are so life changing.

The other problem to HMRC of course is the existence of enquiry windows.

Settlements and Enquiry Status

For many a year it has been set in legislation (S9A TMA 1970) that HMRC have to open enquiries into a tax return within a strict deadline. If they do not manage to do this then the return cannot be enquired into unless there is a ‘discovery’ of information that was not made available at the time of the window in which case 4/6/20 years may be possible (S29 TMA 1970).

HMRC have always been aware of these loans therefore, for some people enquiries into their returns are open and have been for years without any obvious attempts by HMRC to progress them to closure and provide certainty to the taxpayer. However for many others this is not the case.

The disguised remuneration settlement opportunity states that for HMRC to agree ‘settlement’ (which is effectively pay all the tax due, plus interest* from the time of the loan up until the date of settlement) then the beneficiary must make full ‘voluntary’ restitution for years where no valid enquiry exists. The loan charge also applies to all years.

*HMRC have agreed that where no valid enquiry exists they will not apply the interest.

Therefore due to the long standing existence of the very necessary enquiry windows, what we are left with are individuals assuming that their historic loans, where no enquiry has ever been opened, were fine and would never become a potential liability.

On that basis, even if they considered the potential worst case scenario, there was no reason for these people to put money/savings aside for any potential bill.

Where enquiries are open, the argument remains for some that it cannot be correct for HMRC to open enquiries and leave them open until a time they see fit to change the law into a position that benefits them.

Enquiry windows should not ever be ignored as they are the spine of the entire tax system. Without them the taxpayer would have to live their lives unsure of their own finances. The LC applies to all payments going back to 1999 irrelevant of having an open enquiry. The uncertainty that brings should not be underestimated. It is that continuous protracted uncertainty, exacerbated by HMRC’s inaction and keeping enquiries open for years that it is now the straw that is breaking the taxpayers’ back.


As mentioned earlier, in 2011 HMRC introduced the Disguised remuneration rules, ignoring the obvious elephant in the room question of why didn’t HMRC use these to ‘clean up’ back to 1999, I think it’s reasonable to state that most people want HMRC to continue clamping down on those who bend or break the rules. However, they must do it fairly and therefore only bring in legislation that is forward looking. If that was the case, I’d have no sympathy for those caught cheating. However, when I have clients actively considering suicide and mental breakdowns on the phone or in the office, I strongly question the need or sense of applying retrospective taxation. I would estimate that over 50% of the people I’ve advised

on the matter of the LC have stated they are, at least, having to sell their homes to pay. The number of bankruptcies will be huge but, worst of all, and I sincerely hope I’m wrong on this one point, the attempted suicide will just be the tip of the iceberg. I’ve spoken to too many broken individuals to think otherwise now. So, going back to the HMRC quote “This measure is not expected to have a material impact on family formation, stability or breakdown” I take no joy whatsoever saying, HMRC you are simply wrong.

Therefore HMRC, I’m no longer asking you to consider changing the rules of the loan charge from my position as a tax advisor, I’m no longer even asking you to consider it from a taxation point of view. I have no doubts that you brought this measure in purely to clamp down on avoidance and as I stated earlier, I applaud you for that. Your role in society is of the utmost importance and no reasonable member of society would disagree. I applaud the hardworking members of your staff, many of whom I know from the 14 years I spent with you. I thank you for the great career you gave me for which I’m personally eternally grateful.

Instead I’m pleading with you, as the decision makers, as a fellow human and on behalf of all the broken people I’ve spoken to of late, especially those that have tried or are considering suicide, please listen to what you’re being told. I for one will be happy to come in and evidence the very real despair the LC is causing. Let’s not wait until it’s too late.

Philip Manley