Freelancers: the tax man is coming for you

But then you probably already know that if you’re one of the estimated 50,000 people who HMRC is pursuing for unpaid taxes dating back as far as 1999. That’s right, you may be liable for 20 years of underpaid taxes. And all because you entered into a scheme recommended by your accountant or your employer.

Where it all began

In the late 90s and early 2000s all the way through to a few years ago, complex tax schemes were being sold to ordinary people. These are the sort of schemes you might expect celebrities and wealthy business people to buy into in order to save themselves millions in tax. And they did!

But plenty of ordinary workers in the IT, healthcare, engineering and other sectors also signed up. If you were a freelancer or agency worker, you may have been told that there were tax savings to be had by opting out of the usual PAYE system, setting up a limited company and taking your earnings through clever tax schemes.

Tax-free loans (apparently)

So instead of being paid directly by your employer and suffering deductions via PAYE, or signing up to a short term contract and getting paid on PAYE via a recruitment agency. You were instead told that as the director of your own limited company (also referred to as a Personal Service Company or PSC), you could take a small salary under PAYE along with an interest free loan from your PSC. After all; it’s your business, right?

In most cases these loans were designed not to be repaid, or at least it was the intention that they would never be repaid. The money received by way of loan was not treated as taxable income and not subject to national insurance contributions, and you would not disclose these sums on your self-assessment tax return. That’s a fairly chunky saving as your income could essentially be tax free. Sounds too good to be true of course – and so it has proven.

HMRC on the war path

Perhaps unsurprisingly, HMRC took a fairly dim view of people paying little or no tax using schemes which promoted loan style arrangements. In 2004, under the Disclosure of Tax Avoidance Schemes (‘DOTAS’) regime, HMRC required tax payers to disclose their participation in schemes which led to them paying less tax than they would otherwise have paid under usual PAYE arrangements. Some people made accurate disclosures and some didn’t, but what this allowed HMRC to do was identify the various schemes in operation.

Over the years, HMRC has made many unsuccessful challenges to the validity of these loan-style schemes. Most ordinary tax payers enrolled in such schemes would have been unaware of the legal wrangling going on in the background. But finally, in the 2016 Budget, the government announced a clampdown on loan-style tax avoidance schemes. This was given statutory authority under the Finance Act (No 2) 2017 and HMRC were now able to treat these schemes as illegitimate tax avoidance. And here’s the kicker – the legislation was applied retrospectively.

So, all the schemes entered into since 1999 were now deemed to be void for tax purposes. As a  consequence, HMRC are levying up to 20 years of income tax and national insurance on the individuals who participated in these schemes. These schemes have been deemed “Disguised Remuneration” as they were intended to hide taxable income in the form of loans. HMRC is now collecting tax under what it calls the “Loan Charge”.

No way to avoid paying up

Even for those who earned a modest income, the tax bill now landing on their door mat is often in the hundreds of thousands. These individuals have no doubt enjoyed the fruits of their tax savings over the past years, and as a result very few will have put money set aside for these huge tax bills. If it all sounds like a bit of a mess, that’s because it is.

HMRC have indicated that they have no desire to cause distress or financial hardship. But it’s hard to see how they can do anything other when asking ordinary people to find a six figure sum. These tax bills are approaching the size of the average person’s mortgage. HMRC may allow people to repay their taxes over an extended period of five or sometimes seven years (possibly longer in exceptional cases). But it still leaves many people with several thousand pounds to find every month – in many cases, more than their income.

What’s the answer?

There are plenty of people out there looking for support. There’s an action group; there’s a judicial review on the cards; and there are more than 200 MP’s who have agreed to raise the issue in Parliament. But it’s hardly likely that Parliament will find time to debate such an issue when we’re facing a constitutional crisis over Brexit. So, the tax bills will stand and the repayments will have to be made. But what about the people who got rich selling these schemes to unsuspecting tax payers? Well of course they’ll probably get away with it like they always do. Or will they?

Who sold you the scheme?

Many of the schemes which actually administered these loans – in return for a very healthy commission of course – have now closed down and the companies which ran them have disappeared (though not in all cases). So, the likelihood of being able to successfully pursue them is slim, even if not outright impossible.

But what about the people who were actually recommending these schemes? The scheme providers also offered a decent wedge of commission to accountants, financial advisers, payroll administrators, and dare I say it even solicitors, to sell these schemes of their behalf. You might have even been recommended a scheme by your employer (it saved them national insurance contributions too)! Perhaps these organisations, and their professional indemnity insurers where they have them, need to bear some responsibility for the advice they gave to often unsuspecting tax payers.

How can Nexa help?

At Nexa we can help you in two ways if you’re faced with a Loan Charge tax bill. First, our specialist tax lawyers can advise you as to your liability. HMRC seem in most cases to have a fairly watertight case, but it’s important that you take legal advice as to validity of any claim for unpaid taxes and the terms of any repayment which HMRC might offer to you. Second, our specialist professional negligence lawyers can work with you to explore whether a claim against the advisers who recommended the scheme to you may bear fruit. No one wants to throw good money after bad, but for many, pursuing a claim for compensation through the courts may be the only option.

Word to the wise

If all of this wasn’t bad enough, there are now companies out there who claim that they have purchased the outstanding loans from the original schemes and are offering to allow you to repay them for a fraction of their original value. The argument being that if the loan is repaid, it cannot be subject to a tax charge. Great, problem solved! Except that repaying the loans at this point in time is too little too late, and HMRC themselves have advised extreme caution if approached by a business offering to accept repayments of a loan.

For more information please contact tax specialist, Femi Ogunshakin using femi.ogunshakin@nexa.law or professional negligence specialist Matthew Dunne using matthew.dunne@nexa.law