Life under the loan charge: An IT contractor’s story

Starting out as a contractor

I got into IT through a college course, and started off as a programmer before eventually moving into the systems administration field.

Back then, computing was an up-and-coming thing and salaries were reasonable. But if you really wanted to make money and gain a breadth of experience, you became a contractor.

It was also the only way to stay technical rather than go down the management route. Contracting was not without risk: you are not guaranteed work and you don’t get a pension, paid sick leave, holiday pay or any other benefits.

When I started contracting in 1995, HMRC (or The Inland Revenue, as it was known then) generally dictated that a contractor had to work via a limited company to engage with end clients.

This was a major headache, with the main downsides being the admin that went with maintaining a limited company, along with the accountancy costs.

My wife kept track of all of the receipts and our side of the book-keeping, and I paid an accountant to save time trying to figure out the tax side of my affairs.

I worked in this way until 2001 when HMRC brought in the IR35 legislation. I had four children to provide for at this point, and as soon as the IR35 legislation arrived my tax burden increased from around 28% to just over 50%.

Like the bulk of the IT contracting industry, this left me with two choices: pay twice the amount of tax that I used to or look for alternatives. Like many others, I chose the latter.

More and more companies started to emerge which were heavily promoting double taxation agreement (DTA) schemes, which made use of loopholes in the double taxation treaties that exist between the UK and other countries to reduce participants’ income tax liabilities.

I looked at a number of them, but my main concern was legality. Some of the schemes seemed to be hiding information from HMRC, so I gave them a wide berth.

Along with a number of my fellow IT contractors, I wanted to make sure HMRC knew everything that was being done. It was apparent to me we were using a loophole in the tax legislation, but I felt assured this didn’t fall foul of the tax policies and legislation that existed at the time.

Another factor that spurred me on was the assurances of my scheme provider about the number of MPs, celebrities and sports professionals who were all using the same mechanism, without any issues.

“I wanted to make sure HMRC knew everything that was being done. It was apparent to me we were using a loophole in the tax legislation, but I felt assured this didn’t fall foul of the tax policies and legislation that existed at the time”

At the end of 2001, and for every year until 2008, I received a letter from HMRC querying my latest tax return, with the occasional follow-up request for more information.

According to my scheme promotor, this was normal. And the enquiries were the same every year, with little deviation.

Life carried on as normal – until I received a statement from HMRC in 2008 demanding all the tax that I now owed (plus interest and penalties) for the entire seven-year period I had been part of that scheme.

The bill was close to £450,000 – a figure that even if I sold my house and used all of the available equity was unachievable for me to raise.

The timing of the payment demand was no coincidence. The 2008 Finance Bill featured anti-tax avoidance legislation that sought to clampdown on the use of DTA schemes. Furthermore, a clarification notice from HMRC made a point of stating the scheme promoter’s interpretation of the legislation that led to the emergence of these schemes was wrong.

Which begs the question, why did HMRC take seven years to tell us that? Furthermore, should HMRC be allowed to wait seven years to tell someone they misunderstood something, and then charge interest and penalties on the money they claim they should have been paid?

Along comes the credit crunch

Heading out of 2008 with a bill for almost half a million pounds, we hit the credit crunch. I was working in the financial sector and ended up out of work. As a contractor, there was no redundancy payment to help me deal with that.

After a few months in this position, I had no choice but to sell my home to support my family. Towards the end of 2009, we moved into rented accommodation and I fell into a deeply depressed state.

I felt like a failure, and that I had let my family down. During this depression, I gained 10 stone in weight and I couldn’t see any light at the end of the tunnel. If my children were older at the time, I could have ended it all then.

By the time I dealt with my depression and finally got back into work early in 2012, I initially used the same scheme provider which had been assuring me the DTA investigation by HMRC would not be fruitful.

The provider had also changed the remuneration scheme it offered to a loan-based one, whereby contractors are reimbursed for the work they do in the form of non-taxable loan, rather than a conventional salary.

I had eaten through the equity that I’d been building up over the years as a homeowner, so I was desperate to get back to work and earn again. This scheme seemed to offer an admin-free way of doing just that.

During the three years I was out of work, more letters from HMRC arrived about my outstanding debt, while reinforcing its view the DTA scheme I used did not work.

These letters were disturbing and left me with significant bouts of anxiety over the years, but I could cope with them because I knew HMRC would have to argue its case in the courts. I was hopeful sense would prevail, and optimistic the matter would resolve itself, and that I might even get to a point where I could buy another house again.

That was until the accelerated payment notice (APN) legislation was introduced in 2014 as another tool in HMRC’s anti-tax avoidance arsenal, in that it provided the organisation with a mechanism to demand the tax it claims to be owed upfront.  

There is no means of appealing an APN, and contractors are expected to pay what is owed until the scheme they used has been through the tax tribunal and courts. If HMRC loses the case, the individual will be reimbursed for any tax paid afterwards, which could be years later.

I do not know of any other situation where two parties have a disagreement over the amount of a bill and one party can force payment without some level of adjudication.

The APN instantly transformed my £450,000 payment demand into something I thought would run its course through the courts in due time to a sudden and very real threat to my solvency, my livelihood and – again – my mental health.

The £450,000 figure is not the end of it, though, due to my subsequent exposure to the loan remuneration scheme. Before interest and penalties are taken into account, I estimate my tax liability since 2008 is likely to be in the region of £250,000.

Figuring out the financial fallout

I have no means of paying the tax upfront, which means I will be forced into bankruptcy. Because I currently work in the finance sector, being declared bankrupt means I’m liable to lose that job, and finding another in the same field will be difficult because of the pre-employment credit checks firms in this sector carry out.

At some point in the future, I will end up unemployed and largely unemployable. And maybe even homeless as well, because you cannot rent in the private sector without a good credit rating, which will be trashed if I am declared bankrupt.

Every letter from HMRC sends my wife and I into a state of panic, and she has now stopped reading any correspondence from the taxman because she breaks down in tears after reading them.

My children are being negatively affected too. My second son offered to give up college in 2017 to get a job because he didn’t want to burden us with looking after him anymore.

I cannot tell you how soul-destroying it is to listen to your child rationalise the destruction of their own future because they see their parents struggling in this way.

As for the future, I honestly don’t see one. I can’t plan anything. I can’t save. I can’t have any assets because they would be seized in a bankruptcy situation. What makes it harder is knowing I can’t offer any financial help to my children, because anything I put aside for them could go at any time.

The past 15 years have been very difficult, with this constant cloud looming over my head. It has affected my mental and physical state.  

It has impacted my marriage and I have spent over a year receiving counselling, as my wife and I came very close to splitting up in 2017.

My problems pale in comparison to some of the other contractors who are in the same boat, though. Lots have lost their partners, and I know of a few that have taken their own life as a result of living with this constant stress.

Doing the same crosses my mind more and more as time goes on. If I thought this issue would disappear once I’ve gone, I probably would have by now.

What needs to happen next

The combination of the loan change and the APN legislation means the concept of justice is something HMRC now defines.

HMRC acts as judge, jury and executioner with little or no appeals process, because – realistically – how many families can afford to start judicial review proceedings against them?

The tactic is clearly to make people think they have little choice but to pay up, agree a settlement or work out a time-to-pay arrangement.

“HMRC acts as judge, jury and executioner with little or no appeals process. The tactic is clearly to make people think they have little choice but to pay up, agree a settlement or work out a time-to-pay arrangement”

But with government and campaigner estimates suggesting there could be anywhere between 50,000 and 100,000 individuals in a similar situation to mine (with regard to the loan charge policy) it is clear what needs to happen now.

The tax laws need to be made clearer, so they are not open to multiple interpretations, and questions need to be asked about whether HMRC should be allowed to pursue people for retrospective tax, when it failed to act using its existing powers at the time.

When I started contracting in 1995 there was a very clear distinction between tax evasion and tax avoidance, which I have always been mindful of over the years.

The last thing I would have ever wanted to do was fall foul of the law and wind up destroying my family by being put away in prison for evasion.

And if you don’t want people to use certain mechanisms that make it possible for tax avoidance to take place, make them illegal prospectively. Not retrospectively.           

I have strived to ensure over the years that how I operate as a contractor has been lawful throughout my career. If these loan remuneration schemes are not to be adopted or used, HMRC needs to make them illegal to use. Because this would stop people like me, on the advice of accountants, falling foul of HMRC and its regulations.