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It’s fair to say that HMRC’s introduction of the loan charge for 2019 has been met with a huge amount of negativity. In fact, such resistance has been faced, that calls have been made for a change of leadership within HMRC in a bid to restore some public faith within the department. With the aim of the policy, which has been in force since 5th April 2019, to recoup over £3.2 billion of unpaid taxes, we take a deeper look at some of the reasons behind such widespread dismay.

In this article, we will give you all the information you need to know about the loan charge; including exactly what it is, why over 140 MPs are against it and the worrying reality the change has brought about for families around the UK.

What is the 2019 Loan Charge?

The vast majority of contractors will be familiar with IR35, which was introduced in a bid to tackle ‘disguised employment’ back in 2000. Since then, HMRC have been working tirelessly to ensure that any tax loopholes have been stamped out, this has resulted in the loan charge being implemented this year.

Initially, the loan charge scheme was announced back in the Budget in 2016, and at the time, it was stated that the policy would ensure users of tax avoidance loan schemes would pay their share of tax. In total, it was estimated that the loan charge policy would raise in excess of £3.2 billion when it officially came into force.

In essence, the loan charge is aimed at tackling a type of employment tax avoidance, which HMRC refers to as “disguised renumerations”. The government is introducing a charge on unpaid loans that contractors received, in place of regular salary payments. The loan charge has come into effect as the Treasury is looking to recoup what it sees as unpaid National Insurance and income tax from the past 20 years.

Normally when you are given a loan, you will pay it back in full and in many cases, it will usually have interest added. But the loan schemes some contractors had been utilising, are paid in such a way that it means they will never have to repay the actual loan. In short, this means that the person receiving the money from the loan scheme will not have to pay any tax on the monies received, despite it obviously being a form of income.

At present, HMRC have stated that people who have used these types of schemes have a choice – they can either:

  • Repay the original loan in full to avoid any penalties in the future
  • Agree a settlement with HMRC which could be considerably less than paying the full fee
  • Pay the loan charge when it comes into force, which is likely to be the least attractive option of the three

HMRC have confirmed that anyone agrees a settlement with them, who is earning less than £50,000 per year and no longer uses tax avoidance schemes, can spread the cost over a minimum of five years. Whilst anyone earning less than £30,000 per year, will be able to spread the cost over a minimum of seven years.

The result of the loan charge means that you are likely to pay tax at a higher rate than you would have at the time the loans were actually paid out. However, if you choose to settle your tax affairs with HMRC before the loan charge came into full force, you would pay tax at the rates for the years you received the loans.

It is believed that loan scheme users have on average, twice as much income as the average UK taxpayer, and over 70% of users have used the scheme for two years or more. HMRC states that the average amount of tax avoided on a yearly basis is around £20,000 per person.

HMRC have also confirmed that anyone who used loan schemes for an extended period of time, will be subject to higher tax bills than those who only used them once.

Who Will Be Affected by The Loan Charge?

Only a tiny percentage of the UK population will be affected by the new loan charge that is now in place. The loan charge will affect anyone who received loan payments instead of a salary and didn’t pay income tax or National Insurance on this payment. This will affect all people who entered into this type of tax avoidance agreement, regardless of their income, employment status, or the type of work they carry out.

The loan charge shouldn’t have much of an effect on any contractors who started after 2011, as HMRC only started to properly tackle these types of schemes around this time. It was back in the 1990s and early 2000s, where some contractors were regularly paid in loans, rather than receiving a regular salary. This way, the self-employed worker could lower their tax burden considerably, without breaking the law. Although, HMRC states that around half of scheme users have actually received a loan from the now illegal schemes, within the last 7 years.

Of those affected by the loan charge, 65% are said to work in business services, which includes IT consultants, financial advisers and management consultants. Fewer than 3% work in medical services or teaching and less than 2% work in the social and community services sector. 

So far, it is said that over 24,000 scheme users have registered an interest to settle their tax affairs, and thousands have successfully paid what they owed to HMRC and have since stopped using these types of avoidance schemes.

Thankfully, accounting for contractors has come a long way since the changes have been made, and there are plenty of ways to maximise your take home pay within the boundaries of the law.

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Why the Loan Charge Has Been Met with Resistance

Since being announced in 2016, the loan charge has been faced with a huge amount of resistance from contractors and MPs alike, as the vast majority of those affected by the change were poorly advised. In many cases, those who knowingly used these type of loan schemes did so after being assured by professional tax advisers that they were within the constraints of the law and fully approved by HMRC. However, many more of those affected by these types of schemes were employees in the public sector and were not actually aware that their pay arrangements involved loans at all.

This stance is further backed up as the BBC reported on a case where a social worker had been made redundant by her local council. The case has since been presented to the Lords committee and the evidence reported included the following: “It [the council] had a farewell party on the Friday, and on the Monday it said ‘If you join this agency and use the scheme, we will re-engage you as a contractor.’

“She was re-engaged as a contractor for five years but at the end of the five years, the council told her it would re-employ her as an employee, which it did.

“She was unaware of what was going on. She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it.”

The argument from most who oppose HMRC’s stance on the loan charge is certainly strengthened by this particular example. For an employee to completely unknowingly sign up to a scheme on the basis of advice and guidance from what they believed to be a trusted employer, and then be charged a huge loan charge, is completely unfair on the employee.

It’s estimated that the changes, which came into effect on 5th April 2019, will affect over 50,000 taxpayers in total. HMRC have warned that the charge will add together all outstanding loans which have been accrued over the last 20 years and tax them as if the amount had been earned in one tax year. Those affected by the loan charge say they will face “financial ruin” as a result of their loans being taxed as one lump sum this year. The Loan Charge Action Group has called for the charge to be forward-looking, rather than retrospective, which would appear to be a fairer way to move forward.

Over 140 MPs have also questioned the fairness of the loan charge since it was announced in 2016, along with a whole host of leading lawyers, as well as professional and tax accounting bodies from across the UK.

The opposition to the loan charge was so profound, that it has resulted in a letter from a group of cross-party MPs calling for a delay to the charge last week, but the Treasury swiftly moved to reject this motion. HMRC argue that with the loan charge being announced back in 2016, loan scheme users have had ample time to get their affairs in order before the April 2019 deadline hit.

The Worrying Reality of The Loan Charge

The loan charge is already being seen to have a significant impact on people’s lives across the UK. With a report in the Financial Times suggesting that some people have had to go as far as selling their own homes in order to pay off their debt to HMRC.

Even more worryingly, there are reports that the loan charge has been linked to several suicides, after a survey conducted by the All-Party Parliamentary Groups (APPG) found that almost half of the 1,800 people who responded said they were at risk of going bankrupt due to the changes which are now in force.

MPs have even gone as far as accusing HMRC and the treasury of waging a “cynical campaign of misinformation” in a bid to cover up the past failings of HMRC.

Loan Charge APPG Chair Sir Ed Davey said: “The Treasury report fails to deal adequately with the widely-held view that the loan charge represents a change in the tax law for past years – and offends against the rule of law.

“The loan charge is retrospective in many aspects and sets a dangerous precedent as an attack on long-standing taxpayer protections.”


If you do require any more information, please feel free to get in touch with our experienced and trustworthy team of contractor accountants who would be more than happy to provide you with all the assistance you need. You can also use our contractor tax calculator to find out just how much your take home pay could be if you choose to utilise the services of Gorilla Accounting in the future.