Loan charge contractors face double whammy of life-changing repayment demands as past loans recalled

The loans versus income argument

The reason for that is fairly straightforward, according to Andy Wood, founder and director of tax advisory firm ETC Tax. “The effect of the loan charge is that the loans are taxed as income,” he said. “However, for legal purposes, they are – all things being equal – still loans.”

As such, if the owner of that debt (or loan) decides they want that money back, they are well within their rights to request repayment. However, this is an outcome that few – if any – loan scheme participants have ever budgeted for.

According to an IT contractor who took part in schemes associated with several different trusts between 2010 and 2017, there was always an understanding between the trusts and the beneficiaries (the participants) that the loans they received would never be recalled.

“The trusts were set up solely in the interests of the beneficiaries, so as much as the loans are completely genuine, the trust could not recall them because it would not be in the best interests of the beneficiaries. Everyone understood this,” the contractor told Computer Weekly, on condition of anonymity.

Now the loans have been sold on to third parties – FS Capital and Felicitas – that do not seem to be bound by the same rules under which the original trusts operated. And so the protections previously afforded to participants now seem to have disappeared, said the contractor.

“So, if the loan is repaid to FS Capital or Felicitas, the loan charge and any other outstanding accelerated payment notices [from HMRC] would still be payable, which means everyone involved is facing a double whammy of payment demands,” the contractor added.

Assessing the impact on already stressed contractors

This situation is likely to exacerbate the stress and anguish that many contractors affected by the loan charge are already experiencing, said Steve Packham, spokesperson for the Loan Charge Action Group (LCAG), which provides support and advice to individuals caught by the policy.

“These individuals now face having to pay the loan back and still having to pay vast amounts of unproven tax on these loans,” Packham told Computer Weekly.

“This is absurd, but also grossly unfair and dangerous. Bankruptcy would be inevitable and, with seven known suicides of people facing the loan charge, this situation creates a serious risk of further tragedies.

“The fact that they are being recalled clearly shows that the loans are loans and that HMRC is wrong to be treating them as income. This must be addressed so that people are not wrongly pursued for tax which they do not owe.”

Research compiled by the Loan Charge All Party Parliamentary Group (APPG) in late 2019, as part of its inquiry into the policy’s impacts, revealed that 39% of those within the policy’s scope have experienced suicidal thoughts, and 68% have suffered depression.

In the light of this, the fact that these loans are now being recalled is “clearly unfair and wrong”, said Mike Penning, one of the Loan Charge APPG’s three co-chairs, and is something the government must act on urgently.

“It is appalling that people are facing a huge loan charge bill and are facing recall of these loans at the same time, meaning they face being hit twice for vast unpayable demands,” he said. “Either it is a loan or it is income. It can’t be treated as both.”  

For this reason, Penning said the APPG would call on the government to address the issue in the forthcoming Finance Bill.

At the time of writing, it is unclear when the final version of the Finance Bill 2020 will surface, given that the draft version of the legislation dropped in March 2020.

What’s in a claim?

While contractors wait and see if the APPG succeeds in getting the matter addressed by the government, several tax advisory firms are currently trying to reach some form of resolution with FS Capital and Felicitas Solutions.   

Wood’s firm, ETC Tax, is among these and is assisting hundreds of contractors to contest the demands because, in his view, the letters offer scant proof that either of these firms have acquired the loans they are seeking to recall.

For this reason, Wood claims that the letters are in breach of “pre-action protocol”, which means they do not adhere to the series of steps that an organisation or individual must take to bring a claim or resolve a dispute in court.

“My advice to contractors is to dispute the letter because it’s got more holes in it than a piece of Swiss cheese,” he said.

This is perhaps why, when the FS Capital letters first emerged in November 2019, a number of contractors contacted Computer Weekly for help to ascertain whether or not the letters were genuine, or part of a scam designed to prey on people already weighed down with sizeable loan charge-related bills.

And it is not hard to see why. A quick search for FS Capital at Companies House confirms that the business has only been in operation since mid-May 2019. Also, the loans it was attempting to recall were thought by many contractors to be under the control of a Switzerland-based trust known as Pinotage.

And yet a letter arrives from an entity, previously unbeknown to the recipient, stating that their loan is “now due and payable” and that interest on it will start to accrue seven days from the date of the letter.

These letters were interpreted by some recipients as a demand to pay what they owed in full straight away, but FS Capital director Simon Emblin denied that in a statement to Computer Weekly.

Instead, these initial letters were intended to make contractors aware of the change in ownership of their loans and open a dialogue with them about how they intended to pay, he said.

“FS Capital, as the new acquirer of the debt, was required to notify all the contractors that it had acquired the debt and to inform them that the loans were now payable on demand,” said Emblin.

“Having done that, it [FS Capital] then wrote to all the debtors to offer them a number of options to settle at a much reduced cost, while still preserving its right to enforce the full debt should negotiations ultimately fail.”

Computer Weekly understands that one such reduced repayment plan saw contractors offered the chance to clear their whole debt in exchange for parting with 6% of the total loan amount they owed, plus a £950 administration fee.

These negotiations are known to involve at least two tax advisory firms – WTT Consulting and Peak Performance – which, separately, are acting on behalf of two tranches of contractors to get FS Capital to consider revising down the 6% figure further, according to sources with knowledge of these negotiations.

“FS Capital looked to engage with organisations that held themselves out as representing large numbers of the debtors, namely Peak Performance and WTT Consulting,” said Emblin in his statement.

“FS Capital recognised that such parties could potentially bring large numbers to the negotiating table and therefore it was prepared to settle for amounts lower than set out in the ‘without prejudice’ offer letter.”

He added: “In the interests of allowing these discussions to take place, FS Capital unilaterally offered a moratorium period on any debt collection. To date, FS Capital has not proceeded with any debt enforcement action against any debtor.”

A stall in negotiations

An unspecified number of contractors have reached individual settlements with FS Capital, said Emblin. “However, the discussions with both Peak Performance and WTT Consulting have stalled,” he added.

Representatives from Peak Performance and WTT Consulting confirmed to Computer Weekly that negotiations had indeed slowed in recent weeks, but the companies claimed the reasons for that lay with FS Capital.

In a statement to Computer Weekly, Graham Webber, director of tax at WTT Consulting, said his company had been in “fairly frequent touch” with FS Capital over the past few months to ascertain the “strength of their claims” and the likely consequences of “meeting or resisting” them.

“We have been investigating these and seeking a path for our clients that achieves the best outcome for them [the contractors],” said Webber.

“To this end, we have made a series of proposals to FS Capital which, for various reasons, have so far failed to find approval. We are continuing the discussions and have not ruled out reaching an accord.”

A resolution to the situation became further complicated in February 2020, when Emblin was arrested by HMRC, which prompted Peak Performance’s representatives to withdraw from negotiating directly with him.

Peak Performance’s involvement in these discussions is being conducted by a related organisation called the Loan Assignment Group Association, which is seeking to resolve the FS Capital matter on behalf of 700 contractors.

In a statement to Computer Weekly, a representative for the association confirmed that the discussions with FS Capital had stalled, and cited Emblin’s arrest as a causal factor.

“For legal reasons, all contact with FS Capital must now be conducted through the association lawyers,” said a spokesperson for the association in a statement to Computer Weekly.

“We understand that Simon Emblin was arrested and questioned by HMRC in February 2020 and remains a suspect in an ongoing HMRC investigation, which may relate in part to the loans he is trying to enforce.

“It is therefore not possible to continue discussions with him personally. Our solicitors have offered to speak to FS Capital’s solicitors, but Simon Emblin has rejected this out of hand. So yes, Simon Emblin is correct when he says discussions have stalled. The association solicitors are in written communication with FS Capital.”

Emblin confirmed his arrest but strenuously denied any wrongdoing in a statement to Computer Weekly, and said he had been released without charge by HMRC and was assisting the agency with its enquiries, which are unrelated to his work with FS Capital.

“FS Capital continues to carry on its lawful business,” said Emblin in a follow-up statement. “The [association] may not be serving his members’ best interests by unilaterally withdrawing from negotiations, as the aim of such discussions was to avoid the need for FS Capital to commence formal debt enforcement action.”

Currently, FS Capital is amidst a moratorium on taking debt enforcement action against the contractors who are yet to reach a settlement with it. This period was due to end on 31 March 2020, but will be extended until 30 April 2021, the company confirmed in an email to contractors on 27 March 2020. This is on the proviso that “debtors” part with £950 first.

“The moratorium on taking debt enforcement action is due to end on 31 March 2020,” it said in the email, seen by Computer Weekly. “Although discussions continue with both Peak Performance and WTT Consulting, very little progress has been made, and the current coronavirus situation has only made this worse.

“FS Capital has therefore concluded that, in the current uncertain environment, it is prepared to offer an extended moratorium that will last until 30 April 2021. This offer is made on the basis that you confirm that you are prepared to enter into an agreement with FS Capital by 30 April 2020.”

By doing so, FS Capital pledged in the email that it would take “no enforcement action whatsoever” with regard to contractors’ debts before 1 May 2021.

“FS Capital agrees not to assign or otherwise transfer ownership of the debt to any other party prior to 1 May 2021,” it said.

“In return for which, each debtor will enter into such an agreement and will pay FS Capital £950 by 31 May 2020; such amount to count as a part payment towards any final settlement to be reached with FS Capital.

“No interest will accrue on the outstanding debt from the date any such agreement is entered into until 1 May 2021 at the earliest,” the email added.  

According to Emblin, the fact that FS Capital has held off pursuing any debt enforcement action against contractors to date is “indicative of the company’s desire to reach a settlement by agreement”.

He added: “Ultimately, for those parties that do not want to engage, FS Capital will have no alternative but to enter into formal proceedings and seek full recovery of the debt plus outstanding interest. This is not FS Capital’s preferred option but, failing all else, it is an option that will be exercised.”

A tale of two loan firms

Felicitas Solutions, meanwhile, is based in the Isle of Man. The company has been up and running since 6 January 2017, and has ties to another couple of businesses with similar names that are registered with the Malta Financial Services Authority.

Some of Felicitas’ letters are being sent out directly from the company to contractors, whereas others are being distributed by a legal firm based in Knutsford, Cheshire, called Gladstones Solicitors.

At the time of writing, both Felicitas and Gladstones have failed to respond to any of Computer Weekly’s repeated requests for comment since its letters started appearing in contractors’ mailboxes in February 2020.

Similar to the FS Capital letters, the first correspondence tells recipients that their loans have changed hands and been passed on to Felicitas, before setting out how much they still owe and details of any repayments that have been made to date. Subsequent letters, seen by Computer Weekly, then progress to a discussion of interest repayments.

ETC Tax’s Wood is helping a number of contractors dispute these letters, which concern loans they received from several trusts from late 2012 onwards.

Wood has drafted a letter that recipients can send back in response, or they can get his company to send it on their behalf free of charge, he said.

“We’re not charging anything for it, and it basically says we want this information that you should have provided as part of the pre-action protocol, and the documents you would rely on in court [to make a claim],” he said.

At the time of writing, Computer Weekly is aware that a number of individuals who have gone down this route have received responses from either Gladstones or Felicitas directing them to a URL where they can reportedly access the information they need.

The URL leads to a client login page on the Felicitas website, and visitors to it need to contact Felicitas to create an account so they can access the documentation concerning their loans.

“Clearly, this is not good enough, and most people are very wary of clicking on these links as they think it is a scam,” said Wood. “We are requesting paper documents or asking that they email them to us.”

Also, whenever contractors have asked ETC Tax or another tax firm to deal with Felicitas and Gladstones on their behalf, these requests have been ignored, with letters continuing to be sent directly to the contractors themselves.

At the time of writing, it remains to be seen what the next steps will be in the Felicitas case, but Wood has his own ideas about how the situation could pan out.

“My take on it is that this is essentially an exercise where they send these letters out to 1,000 people, and even if just five of them are vulnerable enough to pay up, that will give [these companies] a return on investment that will make it worthwhile,” he said.

History repeating itself

On that point, it is worth noting that neither FS Capital nor Felicitas Solutions are the first companies to write to contractors already in scope of the loan charge, urging them to consider paying back all or part of the money they received in loans.

Another entity – trading as both Trust Help Line and Helpline Services – emerged in mid-2018, and similarly claimed to be acting on the behalf of various EBTs that offered loan remuneration schemes to contractors between 2008 and 2016.

This organisation began emailing contractors, offering them access to an online portal that claimed to host information about the outstanding value of any loans they had received, before requesting information about how they intended to respond to the looming loan charge policy.

The recipients of these emails told Computer Weekly the messages were unsolicited, leaving many to assume that their past involvement with these trusts had somehow led to their details being passed on to the perpetrators of phishing scams.

Particularly as the email urged recipients to upload copies of documents pertaining to their loans, along with a passport photo of themselves and details of where they live, which is information many contractors might reasonably assume that anyone with prior knowledge of these arrangements would have.

A copy of the email, seen by Computer Weekly, also makes reference to a series of financial penalties it claims contractors are leaving themselves open to if they fail to act on Trust Help Line’s missive in a timely way.

“Even if you’ve already settled your income tax liabilities with HMRC, your loans are still outstanding,” it states. “HMRC says those with outstanding loans might incur 10-year periodic inheritance tax liabilities. The [EBT] trustees might charge you interest.”

It continues: “You still need to tell us what you’ve decided to do. If you haven’t completed all the necessary steps through our portal by 31 January 2019, it is likely to cost you more to resolve your loans and end your involvement in the trust. You may have outstanding tax liabilities and you will still have outstanding loans if you do nothing. You are most likely to save money if you act now.”

Computer Weekly understands that individuals contacted by Trust Help Line were also offered the chance to have their outstanding loans released and cancelled if they were willing to pay 5% of the total loan amount.

It is unclear how many contractors complied with this request, or supplied their details to Trust Help Line ahead of its 31 January 2019 deadline.

According to Companies House, Helpline Services (which was incorporated in December 2017) is due to be dissolved within the next few months, following the filing of an application to be struck from the Companies Register in January 2020.

A message on the Trust Help Line website states that its online portal has long since been decommissioned and all the information it previously held on contractors regarding their loan agreements has now been returned to the original trustees. “Our obligations are fulfilled and our work is complete,” it says.

There is also an instruction to contact another organisation, Dor Resolution, if people visiting the site still require assistance with having their outstanding loans written off. That organisation remains active, but has since undergone a name change to Fiscus Management.

Computer Weekly contacted Fiscus Management for comment on this story, but no response was received at the time of writing.

Why recall the loans now?

Another couple of questions that persist in all this are: why did FS Capital and Felicitas decide to acquire the debts from these trusts in the first place, and why have both organisations sought to start recalling these loans now?

Requests made to Felicitas for clarification on this point remain unanswered, while FS Capital offered a response that provides some insight into the timing of its actions, although its motivation for acquiring the loans from Pinotage in late 2019 remains something of a mystery.

What is known is that a Switzerland-based company called Pinotage acquired the FS Capital loans from the original scheme trustee, a Jersey-based outfit known as Praxis IFM, some time in 2018 and began notifying contractors shortly after that about their loan charge obligations.

Under the terms of the policy, contractors were instructed by Pinotage to come forward and register their interest in reaching a settlement with HMRC by 5 April 2019, which, at the time, would have been payable by 31 January 2020.

“If you have not settled and have not repaid the loans, you are now subject to the April 2019 loan charge,” Pinotage told contractors in an email sent in early 2019, as part of a concerted push by the organisation to get beneficiaries to reach a settlement with HMRC.

This email also alluded to some difficulties the company had run into with getting contractors to engage and keep in contact with the firm, and how, as a result, the costs involved with keeping the trust running were not being met.

“It is simply not viable for the trustee to keep the trust running where beneficiaries, and debtors, do not engage with the trustee,” said the email, seen by Computer Weekly. “A professional trustee is entitled to reasonable remuneration, which shall be paid from the assets of the trust. An outstanding loan is an asset, which can be recalled in full to cover such fees.”

The company offered to release the loans of individuals seeking a settlement with HMRC for a “flat fee” of £950, but went on to say that the lack of response to its past communications meant it would consider “all options” open to it once the 5 April 2019 loan charge settlement deadline passed.

“Unfortunately, the trustee is unable to ignore the loans that are in place and must look to deal with them,” the email warned.

It also alluded to the risks posed to the trustees and contractors if the trusts remain active and the loans remain in place, given the “ever-changing tax landscape” as regulators in a “number of jurisdictions have expressed a distinct preference for the loan position of such trusts to be resolved, and the trusts to be wound down as soon as possible”.

According to the statement from FS Capital, Pinotage acquired the loans on the understanding that its ownership of them would be relatively short-lived and the loans resolved, given the looming threat of the loan charge deadline.

“Pinotage was of the belief that this was a short-term assignment as all the beneficiaries of these arrangements had in reality a choice of either settling with HMRC, and subsequently writing off their loans for a small fee, or repaying their loans – both events to occur before 5 April 2019,” said FS Capital.

“The option of settling with HMRC failed to happen for most contractors due to the combined incompetence of HMRC and the failure of many accountants to actively calculate their clients’ liabilities instead of waiting for settlement figures from HMRC.”

Computer Weekly put this version of events to HMRC’s press team, which responded with a statement claiming that “thousands of customers settled their use of disguised remuneration schemes ahead of the 5 April 2019 deadline” and, in doing so, had exempted themselves from having to pay the loan charge.

Computer Weekly also understands that HMRC’s own data suggests that 99% of scheme users who sought to resolve their involvement in loan schemes with HMRC received a settlement calculation by August 2019.

The HMRC statement said: “As part of the government’s response to the [loan charge] independent review, loan charge customers were given more time to file their 2018/19 self-assessment tax return. The deadline is now 30 September 2020.

“We understand that some customers who have been engaging with us to agree a settlement may be worried about being able to finalise their settlement by this time.

“We will continue to help these customers to give them certainty and anyone with concerns should contact the settlements helpline on 03000 534 226.”

Contractor inaction prompts loan recall action?

Even so, FS Capital is of the view that the inability of many contractors to reach a final settlement with HMRC, coupled with a lack of interest in writing off their loans, were factors in why Pinotage acted to offload these loans when it did.

“All these factors meant that, as at 6 April 2019, Pinotage SARL remained the trustee of these trusts and most of the original loans were still in place,” said FS Capital. “The trustees now faced a major problem, as throughout their period of trusteeship, most of the beneficiaries refused for whatever reason to engage with them.” 

At the same time, the company had generated very little in the way of income from its offer to write off the loans for contractors, prompting it to take steps to sell them on.

“Pinotage SARL consequently recognised shortly after 5 April 2019 that, from both a financial and regulatory perspective, it could not keep the contractor trusts going and resolved to exit the structures by 31 December 2019,” said the FS Capital statement.

“This is where FS Capital comes in, as its shareholders were well aware of Pinotage and entered into discussions with it for FS Capital to acquire the various tranches of debt held by the trustees for value.”

For now, this situation remains a developing story, as the contractors caught in the crosshairs of the respective FS Capital and Felicitas Solutions’ letter-writing campaigns face an anxious wait to see whether they will be expected to pay back these historic loans. If so, the end result is likely to be devastating, with financial ruin being an outcome for many.   

At the same time, contractors will no doubt be hoping that the Loan Charge APPG’s call for some form of government intervention in the matter will be heeded. But, until then, the fall-out from HMRC’s controversial loan charge policy continues.