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Comment: Why we need a new disguised remuneration settlement opportunity

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The proliferation of ‘disguised remuneration’ tax avoidance schemes in the last ten years or so has resulted in serious financial harm for scheme users through no fault of their own, with the loan charge being the primary cause. Because scheme users are unable to afford the tax sums being demanded of them, HMRC and these taxpayers have reached an impasse. To break this deadlock, I and a group of tax professionals have called on HMRC and the government to take a constructive, pragmatic approach by recommending that they implement a settlement opportunity on individually negotiated, affordable terms that would offer closure and finality to affected taxpayers.

A few years ago, I noticed a particularly vocal group of taxpayers getting hot under the collar on social media about a piece of anti-avoidance legislation known as ‘the loan charge’. Curious to find out why, I soon realised that the loan charge was having a devastating impact on contractors, freelancers and temporary workers who, through no fault of their own, had been caught up in a particularly aggressive form of tax avoidance scheme known as a ‘disguised remuneration’ (DR) scheme, with no clear path forward. A constructive, pragmatic solution was clearly needed.

Fast forward to early 2021 and I was fortunate to land an opportunity to work with a number of other tax professionals to help find a solution. After several months of deliberation and discussion, we eventually came up with a proposal for a settlement opportunity for DR scheme users, which was addressed to HMRC, the financial secretary to the Treasury and the chancellor of the exchequer. This article explains the problem we are hoping to resolve, how and why the problem has arisen, and how our proposal intends to resolve it.

The problem

HMRC and DR scheme users have reached an impasse: a deadlock in which HMRC have been pursuing DR scheme users for unaffordable, life-changing sums believed to be due under the loan charge, or the threat thereof, to no avail. As far as DR scheme users are concerned, and for reasons which this article will hopefully make clear, all of this has been arbitrarily sprung upon them out of the blue. What’s more, DR scheme users haven’t benefitted from the same level of public sympathy compared with (say) victims of fraud or financial scandals, despite the strikingly comparable circumstances. At best, DR scheme users have been depicted as naïve; at worst, as deliberate tax avoiders. In my view, this is inaccurate and unfair: you only have to look at the facts of HMRC v White Collar Financial Ltd [2020] UKFTT 459 (TC) to see how easy it is for taxpayers to get inadvertently sucked into a DR scheme, even if they conduct appropriate due diligence and ask sensible questions about the UK tax aspects. Also, because DR schemes were often a precondition of the user’s contracts, they were left with a rock-and-a-hard-place choice of either taking a material tax risk with their earnings, or foregoing earnings altogether. An additional sting in the tail, which is arguably even more significant than the tax debts themselves, is that many DR scheme users are also being sued by the current lenders of record for repayment of the loans in these schemes.

All of this has led to catastrophic consequences for the lives and livelihoods of many, and has been directly responsible for eight suicides. It is a deeply unjust and tragic situation that can ultimately only be resolved by HMRC and the government deciding to do something about it, which is where our proposal comes in.

How and why the problem has emerged

How a disguised remuneration scheme works

There are many variants of ‘disguised remuneration’ scheme, but for contractors and agency workers, they typically work as follows. A worker will engage an intermediary, such as a recruitment agency, to find clients for that individual worker to provide services to. The agency will then refer the worker to an umbrella company, which will typically enter into an employment contract with the worker. The umbrella company will then provide the worker’s services to the end client and invoice the agency for the employment costs plus its fees. (The agency in turn will invoice the end client for the employment costs, plus the umbrella company’s fees, plus the agency’s own margin). However, instead of operating PAYE on the workers’ full contract rate, a non-compliant umbrella company will frame the worker’s net earnings as being (say) 90% of the gross earnings to make it appear attractive to the worker, and will only operate PAYE on a portion of the contract rate equal to the national minimum wage. The rest is paid to the worker in the form of a loan or other non-taxable amount to make up the 90%. Meanwhile, the umbrella company gets to keep a substantially inflated fee by virtue of having reduced its employment costs. The example on pages 108–109 of chapter 11 of the LITRG’s Labour market intermediaries report (March 2021) clearly shows how the financial benefit of the tax advantage for the worker is far less significant compared with that for the umbrella company.

Clearly, this is an example of aggressive tax avoidance of the type the loan charge seeks to counter. Despite this, schemes of this nature have been on the increase since the loan charge legislation came into force. Ironically, the loan charge does not apply to loan schemes entered into on or after 6 April 2019, so whether the loan charge actually achieves its purported objective is at best questionable.

The loan charge

The loan charge is ostensibly designed to counter the use of loan schemes that would not otherwise have been caught by ITEPA 2003 Part 7A or, in the case of self-employed traders, by ITTOIA 2005 ss 23A–23H. It taxes, in one go and at current marginal income tax rates, all loans outstanding as at 5 April 2019 that were entered into on or after 9 December 2010 in connection with these schemes, resulting in a liability to the tune of tens, possibly even hundreds, of thousands of pounds. However, the loan charge arguably has a much more pernicious objective than its purported aim: it effectively allows HMRC a fallback position in case HMRC had previously omitted to assess any outstanding income tax liabilities within the applicable statutory time limits under TMA 1970 ss 34–36 (as applied by reg 80(5) of the Income Tax (PAYE) Regulations, SI 2003/2862) (the PAYE regulations)), or in case it had lost to the taxpayer in litigation over the merits of a DR scheme. The legislation is thus retroactive and renders successful litigation nugatory. This clearly upsets the balance between HMRC’s power to collect taxes, on the one hand, and the need for taxpayer certainty and finality, on the other.

When the loan charge was first introduced by F(No.2)A 2017, the loan charge applied to loans entered into on or after 6 April 1999. However, following a review led by Sir Amyas Morse, the government decided that this was too far-reaching and brought forward the cut-off date to 9 December 2010. It did so, however, based on a misunderstanding that the law was clear from that point onwards. In fact, the position was far from clear, since ITEPA 2003 Part 7A did not apply to many of the employer-based DR schemes and had no relevance for the self-employed. This amendment also had limited practical effect for affected taxpayers, since most of the DR schemes in use prior to that date had ceased; while the DR schemes in use since that date have caused serious financial harm.

The government’s other responses to the Morse review recommendations, and the rules implementing them, have also proved deeply unsatisfactory from the perspective of affected taxpayers. In particular, the exemption for taxpayers for whom ‘a reasonable case could have been made’ that they were subject to income tax on a loan made to them in 2015/16 and earlier, who made ‘reasonable disclosure’ of the scheme to HMRC and in respect of whom HMRC had not sought recovery of that income tax as at 6 April 2019 (per F(No.2)A 2017 Sch 11 para 1B), is fraught with difficulty both in terms of its meaning and its practical application, since many affected taxpayers are unable to avail themselves of this exemption. It has also produced a rather odd and perverse result, in that those who knowingly entered into a scheme, and were therefore in a position to make such ‘reasonable disclosure’, are being treated more favourably than those who didn’t do so knowingly.

How our proposal intends to resolve the problem

In outline, the proposal asks the government to consider offering a settlement opportunity to affected taxpayers on a ‘no-fault’ basis, with a view to reaching an individually negotiated, affordable settlement that would give affected taxpayers credit for past compliance, and for HMRC to close off the issue for good. The technical details of each settlement would need to be considered on a case by case basis in light of each taxpayer’s individual circumstances, but the proposal recommends that each settlement reflect the following principles:

  • Any agencies involved in the DR scheme should have operated PAYE under ITEPA 2003 s 44. This will technically depend on whether the worker would have been under the supervision, direction or control of any person – typically the end client. However, in practice, one would expect the answer to be in the affirmative for the majority of DR scheme users who signed up with a recruitment agency, whether or not an umbrella company was involved. In such cases, a PAYE credit should have been deducted from the taxpayer’s self-assessment income tax liability in accordance with reg 185 or 188 (as applicable) of the PAYE regulations, and affected taxpayers should be treated accordingly.
  • The scheme users were either mis-sold schemes or inadvertently dragged into them. A survey commissioned by the Loan Charge and Taxpayer Fairness All-Party Parliamentary Group (APPG) in May 2021 suggests that the vast majority of affected taxpayers either didn’t know at the time that they were being dragged into such DR schemes; or insofar as they did, they were given false or misleading assurances as to their safety by their promoters. As such, it wouldn’t necessarily have occurred to these taxpayers to pay heed to HMRC’s spotlights and warnings on these schemes.
  • HMRC has a track record of establishing settlement opportunities for past users of other tax avoidance schemes, and taxpayers should not be required to admit fault. Settlement opportunities are easier to implement than a change of legislation, and there is precedent for their use. Furthermore, if HMRC have previously been willing to offer settlement opportunities to taxpayers who knowingly entered into a tax avoidance scheme, then there is no reason in principle why they should not consider doing the same for those who did so unknowingly. However, unlike prior settlement opportunities, taxpayers should not be asked to admit fault as a prerequisite for admission to the settlement opportunity.
  • HMRC should close the matter once and for all once a settlement has been agreed with the taxpayer. This would rectify the fact that the loan charge does not currently provide any closure and finality for the taxpayer.

In addition to a settlement opportunity of this nature, the proposal also requests that HMRC pay heed to the CIOT’s recommendations and consider implementing legislation to prevent current creditors of record from suing the debtor-taxpayer for repayment of the ‘loan’ under a DR scheme (see the CIOT’s Budget Representation of 30 September 2021). Such a move would not only resolve the current incoherence between DR scheme loans being treated as earnings for tax purposes, and as loans for contractual debt claim purposes, but would provide welcome relief for affected taxpayers.

What next for HMRC and the government?

It remains to be seen how HMRC and the government will respond to the proposal. It would be in their interests to do so, particularly in light of recent Freedom of Information Act revelations. But one thing is clear: HMRC’s current approach is unsustainable; and it is important that the government treat the situation in the same vein as it would a financial scandal, however it decides to respond. In the meantime, I offer my sincere thanks to the tax professionals who signed up to the proposal. 

For the text of the proposal, see