The Loan Charge - an explainer

25 Sep 2019

Part of an occasional series in which CIOT tax experts explain the background to topical issues

What is the loan charge?

The 2019 loan charge is an anti-avoidance measure, introduced in Finance Act 2016 to address the tax loss to the Exchequer from a variety of ‚ disguised remuneration‚ schemes. Under such schemes, individuals were paid in the form of loans, replacing part or all of their salary. Usually these loans were provided not by the employer, but by a third party such as an ‚ employee benefit trust‚ funded by the employer; and critically, the loans were structured so that they were unlikely ever to be paid back. This was done because loan proceeds, unlike salary, are not normally income, and therefore are not subject to income tax or National Insurance (employee or employer).

Under the loan charge legislation, which was approved by Parliament and which HMRC are tasked with administering, any loans taken out in such circumstances since 1999 and still outstanding on 5 April 2019 became taxable as income in one go on that date. In the period up to 5 April 2019, those affected were encouraged to enter into negotiations to settle past tax liabilities on the basis that the ‚ loans‚ were taxable as income in the years they were taken out. Those agreeing settlements would not be subject to the loan charge.

If it‚ s about tackling tax avoidance why is it so controversial?

Three main reasons ‚ its retroactive character, stretching 20 years into the past; the size of some of the sums being demanded; and the circumstances in which some of the schemes were entered into. Specifically some of those caught by the loan charge argue they were misled and in some cases effectively coerced into entering these schemes as the only way of securing a job. </p>

These arguments are explored further below.

Is the charge a retrospective tax?

The loan charge has often been described as ‚ retrospective‚ . Because the charge is a new tax on loans outstanding at 5th April 2019, technically it is not retrospective, as it does not change past liabilities; however it is undeniably retroactive in that it changes the current tax effect of previous events, effectively brings past tax years back into charge. Tax changes with some retroactive effect are not particularly unusual, but the extent of the retroactive impact (the ‚ look back‚ ) in this case is exceptional. Also, the look back is deliberately structured to ‚ correct‚ past avoidance that people would otherwise have ‚ got away with.

Is a 20 year look back acceptable? Does there come a point where you say ‚ HMRC has been too slow‚ , the year in question has closed‚ time for pursuing this unpaid tax has expired? Campaigners against the charge certainly think so. HMRC‚ s argument, on the other hand, is that the schemes in question never worked, the tax has always been due and that it should have been obvious to anyone receiving payment in the form of a loan that it was tax avoidance. They also say that they have opened tens of thousands of enquiries into the schemes, though many of those caught by the charge appear not to have been previously challenged.

Why are the sums being demanded so large?

As well as the long look back period, the levying of a single aggregate demand for taxes due over a number of years plus interest, has meant that some wanting to settle their tax affairs face very large bills. Those who have not reached a settlement with HMRC and face a liability under the loan charge are also taxed at the marginal income tax rate(s) which would apply if they had received all the loan income in a single year (2018-19), though they do not face interest charges.

Some illustrative examples of how settlement and loan charge calculations work appear on this page on the Low Incomes Tax Reform Group website. (LITRG is an initiative of the CIOT which provides guidance to unrepresented taxpayers.)
So who is affected by the loan charge?

Recent reporting has largely focused on the impact of the loan charge on contractors who believed themselves fundamentally to be self-employed rather than employees. Their position is discussed later.

However, disguised remuneration schemes have been around for a long time and used by a much wider range of taxpayers. In the March 2016 HMRC policy paper which set out the loan charge proposal in detail, HMRC said:

The users of these schemes vary as much as the schemes themselves. They include both employed and self-employed individual contractors, small businesses employing a few staff, and highly paid individuals seeking to avoid large sums of tax and NICs.

What are the origins of these schemes?

Disguised remuneration in one form or another has been around for many years ‚ some will recall National Insurance avoidance schemes paying employees in gold bars or even platinum sponges back in the 1990‚ s. Loan schemes using employee benefit trusts became widely used by banks and other financial services companies to pay bonuses, and by other employers to pay salaries to highly paid employees (including professional footballers).

The users of these schemes ‚ employers and employees ‚ would typically likely have known that they were using tax-driven arrangements to obtain a financial advantage, though the extent of their understanding of the detailed legal arrangements no doubt varied. In summary though, it might be felt that they were knowingly using tax avoidance schemes for no other reasons than personal and corporate gain.

In law, the loan charge initially falls on an employer (although it may be the case that they then try to recoup some or all of it from the employee. HMRC say that the majority of settlements to date have been made by employers.

Following a previous legislative change in 2011, and changing attitudes to tax avoidance, the use of such schemes by large employers had declined by 2016. However there were still some employers who were prepared to use such schemes, and HMRC noted in a 2016 Technical Note that schemes had been developed to try to circumvent the 2011 legislation. Moreover, there were still taxpayers who had used pre-2011 schemes who had not settled their tax affairs with HMRC, and were continuing to contest HMRC‚ s challenge to these avoidance schemes.

When the loan charge is viewed through this lens, although it is a particularly harsh piece of anti-avoidance legislation ‚ the long ‚ look back‚ period, the fact that it brings into charge earnings for years where an enquiry may never have been raised, and the aggregation into one year of all outstanding amounts ‚ for this population at least, it can be viewed as a proportionate response to determined efforts to avoid tax on (sometimes very significant) earnings.

And lower paid agency workers used these schemes too?

Yes. By contrast to the high earning early users of these schemes, it has emerged that some agencies and umbrella companies supplying low paid workers such as locum nurses and supply teachers, were using loan schemes to pay those workers. Here, the tax benefit would, by definition, have been smaller, and may have been largely absorbed by the fee charged to the worker for the arrangements.

The other benefits of using loan schemes, including a lack of employer‚ s NIC, were being taken by the agency or umbrella company, although may have been passed on to the business to whom the worker was supplied.

If such workers were the only group affected by the loan charge legislation, would the loan charge appear a reasonable response? Even the most ardent proponents of the loan charge in government might find that a difficult case to make.

Fortunately, it does appear that the number of low paid workers affected is relatively small. The CIOT has urged HMRC to use all powers of discretion it has in dealing with the incidence of the loan charge on this group.

The Low Incomes Tax Reform Group have published information to help low income workers understand what is happening with the loan charge and where to get help.

What about contractors? How did they end up using these schemes?

This is the group of taxpayers on which most recent reporting has focused. This reporting has frequently linked the use of loan payment schemes with IR35 ‚ which seeks to tackle instances where workers are paid as if they were self-employed when for tax purposes they should be treated as employed.

Contractors (those who work on a contract by contract basis) often used loan schemes where they were advised their status of being ‚ self-employed‚ under ‚ IR35‚ rules was in doubt.

It is widely recognised that the employment/self-employment boundary for tax purposes is highly problematic. The lower levels of taxation for both businesses and workers in respect of self -employment compared to employment create significant incentives for arrangements under which workers are treated as self-employed. It is often businesses who engage contractors who are the most motivated to do this, to achieve reduced employers‚ National Insurance and reduce other employment costs. The boundary between employment and self-employment is difficult to define and is frequently a source of dispute between taxpayers and tax authorities. HMRC has recently lost several high profile cases in this area.

Many contractors supply services to business through personal service companies (PSCs). Previously, this has meant that if there is any doubt as to the employment status of the contractor, the risk is borne by the contractor (through the PSC), not by the business engaging the contractor. This is in the process of change, with the onus being shifted to the business engaging the contractor; it has already happened in the public sector and the onus will shift in the private sector next year.

Historically though, many contractors were unhappy about the level of uncertainty and risk inherent in using PSCs. Loan schemes were sold as a solution to this uncertainty ‚ for example by a contractor becoming employed by an umbrella company which would provide its services to the business, and then pay the contractor through loans. This would leave them in a similar take home pay position to being self-employed under IR35.

Were contractors misled about the legality of these schemes?

In recent reporting in particular, it is often said ‚ loan schemes were legal‚ . This is highly simplistic ‚ a better formulation is that ‚ loan schemes, whilst not illegal, were contrived avoidance schemes which were always likely to be robustly challenged by HMRC.‚ A question arises as to whether users of such schemes were warned of the risks ‚ and that rather than creating tax certainty for the users, they were actually increasing tax risk and uncertainty

Some reports suggest that users were led to believe ‚ DOTAS‚ ‚ Disclosure of Tax Avoidance Scheme ‚ numbers were a ‚ green light‚ for their use, rather than what they should have been seen as, a ‚ red flag‚ that would trigger an HMRC enquiry. In other cases, they might have been told, perhaps dubiously, that disclosure was not required. The law rightly requires taxpayers to take responsibility for their tax affairs ‚ and a taxpayer should never be able to escape such responsibility. Generally, if people fall foul of the law by taking ‚ bad‚ advice, they still remain responsible in law for their action, though they may have a claim against the ‚ bad‚ adviser for the loss they suffer as a consequence.

It should be noted that under professional conduct regulations, tax professionals belonging to a major professional body, such as the CIOT, have been required to explain tax risks related to their advice for many years, and advisers who did not explain these risks could be subject to disciplinary action on a complaint being made. However, we suspect that most schemes were sold by promoters unaffiliated with any professional body.

Another reported issue is that HMRC did not act on ‚ red flags‚ such as DOTAS numbers, and many years passed before many of the scheme users became aware that HMRC regarded their arrangements as abusive. This could also be seen as an argument for some mitigation of the impact of the charge.

Together with the harshness of the regime, and the fact that contractors often saw a significant proportion of their earnings go towards promoter‚ s fees, it is easy to understand why many affected contractors feel a sense of grievance about the tax bills they are now being confronted with.

So is the loan charge a reasonable response to disguised remuneration avoidance by contractors?

Loan schemes are tax avoidance schemes; and engaging in tax avoidance is unlikely ever to be a good or effective answer to tax uncertainty. HMRC were right to challenge the use of loan schemes by contractors. 

However, it is worth asking the question ‚ if contractors were the only group involved in loan scheme arrangements, would the loan charge be a proportionate response to avoidance in these circumstances? This is a more difficult question than for either of the groups previously considered (i.e. employees and lower paid agency workers).

As noted, the taxation of contractors is not a straightforward question in itself, and where there is a significant difference in tax outcomes between two similar situations, this will drive taxpayer behaviour. There is then, the question of whether they were misled, as discussed above.

Furthermore many umbrella companies were based offshore or have been liquidated and are outside HMRC‚ s reach; the charge that would fall on the umbrella company then falls wholly on the contractor, even though they may not have been the only economic beneficiary of the scheme. 

Thus it may be seen that the charge is particularly harsh in its effects on contractors. It could be argued that a more effective and fairer outcome would have some of the risk, and cost, fall upon others in the supply chain, including the ultimate engaging business, or the promoters of the schemes.

So overall?

The CIOT‚ s view is that, on balance, the loan charge can be seen as a reasonable response to tax avoidance - notwithstanding the exceptionally long look back - where it falls on employers, and on those who knew what they were doing. But for some of those caught up in it, the effect may indeed be hard to justify. This is why the CIOT has described the loan charge as a blunt instrument. </p>

So what next?

On 11 September the government announced an independent review of the loan charge. The review has been commissioned by the Chancellor and will be conducted by Sir Amyas Morse, the former Comptroller and Auditor General and Chief Executive of the National Audit Office (NAO).

The government has asked Sir Amyas to report back by mid-November. While the review is under way the government is clear that the loan charge remains in force and work on settlements will continue. HMRC has issued guidance to those affected by the charge. 

Below we look at what the review might consider and also at how HMRC could use their existing powers to mitigate the charge for some of those caught by it.

What can HMRC do using their existing powers?

As explained previously, the CIOT view is that within the affected loan charge population there are a wide variety of circumstances. Reflecting this our view is that, as far as possible, cases should be looked at on a tailored, individual basis. HMRC should use the ability they have under their care and management powers to reach a settlement whereby they agree to reduce the amount of tax collected on any loans brought into charge where there are sufficient mitigating circumstances. This could apply especially to taxpayers on low incomes that were unaware of the implications of the nature of their engagement.

The CIOT also believes, and has said to government, that there are some signs HMRC can use in order to judge who went into these schemes knowingly, and who may look more like victims of mis-selling. For example, directors, with shares in a company, paying themselves in loans, will generally have known what they were doing. Those where the scheme was set up before the person‚ s employment started, and who were not owner managers/directors, may well have an excuse for not knowing. People engaged through certain agencies or umbrella companies ‚ especially those on lower incomes ‚ could be a sign of people who were misled.

What is the review‚ s remit?

The government has published the terms of reference of the review. These state that the reviewer (Sir Amyas Morse) is being asked to consider ‚ whether the loan charge, as it applies to individuals who have directly entered into disguised remuneration schemes, is an appropriate response to the tax avoidance behaviour in question; [and] whether changes announced by the government in advance of, and since, the loan charge came into effect address any legitimate concerns that have been raised about the impact on individuals, including affordability for those affected.

The remit adds that, in considering its recommendations, the review must also take account of ‚ the impact on wider taxpayer fairness [and] HMRC‚ s ability to tackle tax avoidance effectively in the future.

It is clear from the remit that the focus will be on the charge‚ s impact on individuals rather than the employers who, as mentioned above, have made the majority of settlements relating to the charge so far. It is our understanding that the remit has not been written to exclude any category of individuals affected by the charge from the review, notwithstanding the slightly puzzling use of the word ‚ directly‚ in the phrase ‚ directly entered into‚ above. Beyond this HMRC have told us that the direction and focus of the review is in the hands of the reviewer.

What sort of things is the review likely to consider?

It seems unlikely that the charge will simply be torn up. (Ironically, if it was, this itself would be a fully retrospective piece of legislation to take away a tax charge that has already crystallised under the law voted through by Parliament and applying at the time (6 April 2019).) Many taxpayers ‚ across the spectrum ‚ have settled their tax affairs, or are in the process of doing so, on the basis that the loan charge would otherwise apply. Any decision to scrap the charge for those facing it would surely lead to an immediate outcry from those who reluctantly settled with HMRC, demanding those settlements be waived or revisited.

However, the review will presumably explore ways the impact of the charge can be mitigated in instances where it does not appear a reasonable and proportionate response, and where HMRC‚ s ability to make settlements is constrained by their requirement to enforce the law.

In CIOT‚ s view the purpose of the review should be about moving to a more proportionate response on this issue. First it should identify which categories of those affected are suffering under the loan charge in a way that is disproportionate to their culpability, and how many people fall into such categories. Secondly it should assess in what way those groups can most effectively be helped.

Is there a need for more information to be published on those affected?


The review has to be evidence-based. But there is currently a marked lack of information on the use of schemes. The estimated figure of 50,000 quoted by HMRC for the number affected is now very old. It should be updated and a breakdown of groups affected ‚ highly paid individuals, contractors, the low paid and others should be provided, together with an estimate of the tax lost from each group. An update on settlement figures, and an analysis of ‚ lost employers‚ would be useful. This data would be useful in determining if, how and what mitigation may be possible where the loan charge appears disproportionate; and how such mitigation could be fairly applied to those willing to settle their tax affairs.

So far as possible this information should be made publicly available by HMRC, to inform public and political discussion on this high profile issue.

What about the promoters of the schemes?

As well as considering mitigation, the review could also consider the potential mis-selling of loan charge schemes. This would need to include the role of promoters and advisers; and might lead on to wider issues, for example potential regulation around the tax profession, particularly the extent to which the schemes were sold by providers not connected to a professional body, and the relations between such providers and other professionals. This is a thorny issue ‚ at one level greater regulation appears attractive but it can also be seen as creating barriers to legitimate trading and increasing the cost of compliance. Changes in this area should not be made precipitately but may need to be considered.

And wider issues?

The tax incentives driving the sale of such schemes to contractors also need looking at; this would further shine a spotlight on the large differences in taxation between the employed and self-employed, and the need for wider reform in this area.

There are a number of other issues that could be discussed, such as the conduct of HMRC enquiries, which has been the subject of criticism; the generally limited parliamentary scrutiny or apparent understanding of tax legislation before it is brought into law, and the fact that the legislation was brought in after a sustained period of media focus on tax avoidance, which was uniformly hostile, and encouraged ever wider counter-avoidance powers to be adopted with little tolerance to any mitigation. However, the review should primarily be directed to determining the way forward. </p>

So in conclusion?

The loan charge is a one size fits all solution to the problem of disguised remuneration tax avoidance, focused solely on stopping avoidance and collecting tax from those using the schemes. It does not address the question of why taxpayers used these schemes nor the contexts in which the schemes were used. In its application, for some groups of taxpayers, the impacts appear disproportionately harsh. This is driving a sense of grievance in some quarters, some of which may be legitimate. It is imperative in any event that HMRC use their powers of discretion in regard to settlements as widely as possible, especially in regard to the lower paid. The review that has been announced would be greatly assisted if more information was available ‚ and this is likely to make any recommendations to mitigate the impact of the loan charge where this is proportionate more widely accepted.


The CIOT met Sir Amyas Morse on Monday 16th September. In this meeting many of the issues mentioned in this "Explainer" were discussed. These included how the loan charge is an unusual piece of anti-avoidance legislation in that it seeks to tackle avoidance that has previously taken place, and effectively collect tax on this past avoidance. Such an approach challenges the concept of taxpayer certainty, especially when the look-back period is twenty years; and for some groups of taxpayers affected, the loan charge either appears a disproportionate response or it is at least very contentious to argue that it is a proportionate remedy.

Contributors to this explainer included Glyn Fullelove, CIOT President; John Cullinane, CIOT Tax Policy Director; and George Crozier, CIOT Head of External Relations.