Loan charge deadlock traps tens of thousands

Most weekdays, Jim Brown stays at home behind closed curtains. Last year, a debt officer from HM Revenue & Customs turned up at his house unexpectedly to ask how he was going to pay the £200,000 the tax office says he owes. Brown doesn’t know. He doesn’t have any savings, drives a 15-year-old-car and only has a small amount of equity in his home.

“I was probably a bit rude. I was so emotional. Luckily, my kids were at school. Nobody else was here,” he says. “I haven’t got an income, as I’m not working right now. My mortgage has gone through the roof. HMRC has put me on an emergency tax code and I’m paying thousands more in tax, so I’ve been hiding behind the curtains. They could turn up at any minute.”

Brown, who asked the FT not to use his real name, is one of an estimated 60,000 individuals affected by one of the most controversial tax policies ever enacted in the UK — the loan charge. The policy has already been linked to the suicides of at least 10 people. HMRC has reported a further 13 suicide attempts by people affected.

The loan charge came into force in 2019 with the aim of clamping down on the historic use of loan-based tax avoidance schemes. But between the 2016 Budget, when it was first announced, and March 2023, HMRC reports only a minority of those affected have paid it. While 15,000 individuals have settled with HMRC, the tax office estimates around 40,000 have not.

“The loan charge has created far more problems than it’s solved. We’ve seen 10 suicides, family breakdowns, bankruptcies. It’s created a disaster,” says Sarah Gabbai, a tax lawyer at McDermott Will & Emery UK, who has led efforts to encourage the Treasury and HMRC to agree to alternative settlement terms.

“HMRC and affected taxpayers have reached an impasse. HMRC are relentlessly pursuing tens of thousands of people who are simply unable to pay.”

She and other tax experts believe the deadlock is having a chilling effect on HMRC’s abilities to administer the tax system fairly and efficiently.

The UK agency’s customer service performance was last month described by MPs as at an “all-time low”. The department was recently rebuked by ministers for attempting to shut down key public helplines to better manage resources.

“All the people [within HMRC] who are working on loan schemes could be working on customer service,” says Ray McCann, a past president of the Chartered Institute of Taxation and a former HMRC inspector. “No one has calculated the opportunity cost of HMRC pursuing loan schemes for lots of people who can’t pay.”

A ‘failed’ policy

Despite the Treasury accepting all but one of the 19 recommendations of a government-commissioned review (see below) made in 2019, tax experts and campaigners say the loan charge remains a problem for multiple reasons.

“It couldn’t be clearer that the loan charge has failed as a policy,” says Sarah Olney, a Liberal Democrat MP and one of 255 MPs on the Loan Charge All-Party Parliamentary Group, one of the largest such cross-party groups in Parliament.

“The loan charge is fundamentally unfair because it retrospectively places a huge financial burden on people who in the vast majority of cases acted in good faith. We have seen the tragic consequences with 10 people taking their own lives as a result.

“Meanwhile, the firms that mis-sold these schemes seem to have been let off the hook and tax avoidance schemes continue to be promoted.”

According to HMRC data, the number of tax avoidance schemes being marketed (those it describes as “contrived”) has come down in the years since the loan charge was introduced. In 2017 to 2018, the year before the measure came into effect, a peak of 44,000 individuals used tax avoidance schemes. 

This had fallen to 31,000 people in 2020 to 2021, the latest data available. However, over a longer timeframe the number of people using avoidance schemes has remained relatively stable. In 2014 to 2015, there were 26,000 people who had used avoidance schemes. 

The fact that avoidance schemes are still widely available, and the dearth of individuals who have settled with HMRC over the loan charge, “shows what a complete failure the policy is”, Brown argues.

The reason why so few have paid loan charge bills is because “they don’t agree with it and can’t remotely afford it” he adds. But he also believes most people who used loan schemes would be willing to “pay something . . . if it was affordable” to resolve their tax affairs.

The uncertainty of his situation has caused his mental health to suffer. He has been on anxiety medication since 2018. His worsening mental health has made it difficult for him to hold down a job, something he had no trouble doing before learning he faced the loan charge.

“We just want a fair resolution,” he says. “We also want HMRC to be held to account. The government have failed to hold HMRC to account.”

Settlement woes

At a parliamentary debate in January, MPs from across the political spectrum made similar criticisms as they lined up to attack the way HMRC has sought to recoup tax debt from loan scheme use.

Alba MP Neale Hanvey spoke of a constituent who had a disposable income of £360 a month. He said HMRC had asked him to pay £783 a month for the next 12 years, in addition to £50,000 upfront. “It is clear daylight robbery,” Hanvey said in the debate.

MPs and tax lawyers have also criticised HMRC for its recent use of a power, known as a section s684 notice, to pursue loan scheme tax debts incurred before 2010.  

Freedom of information requests have revealed HMRC has issued more than 2,700 such notices between January 2022 and January 2024. This is controversial because the Morse review (see box) found that before 2010 the law was unclear about whether loan schemes were unlawful. Morse recommended the loan charge should not apply to loans taken out before December 2010, a measure the government accepted.

Keith Gordon, a barrister at Temple Tax Chambers, said on X, formerly Twitter, that “HMRC are bypassing the Morse recommendations as adopted by Parliament”.

However, HMRC’s chief executive Jim Harra recently told MPs that the Morse review had said HMRC could pursue pre-2010 loans using their normal powers. He added HMRC’s approach had been “consistent with Lord Morse’s recommendation and Lord Morse was aware of our intention to do this and the extent of our powers before the conclusion of his review”. FT Money has approached Morse for comment.

Meanwhile, tax advisers for people affected by the loan charge report that the settlement conditions for paying the loan charge act as a disincentive for people to settle, even if they could afford to.

Rhys Thomas, managing director at advisers WTT, which represents 2,000 people affected by the loan charge, says the first thing individuals must do is sign a contract with HMRC that says they can never reverse the settlement or reclaim the money, even if subsequent legal changes confirm they were never due to pay the tax.

Furthermore, signing a settlement locks in a historically high interest rate for the duration of the term the individual repays the money. Individuals settling loan charge debts currently pay an interest rate of 8.75 per cent. This rate would stay the same if they paid this back over the next 10 years, say, even if rates subsequently came down.

“The only reason that people are settling is they can’t take it any more,” says Thomas.

He gives the example of one of his clients, a social worker, who was embroiled in the schemes, for whom his firm acts pro bono. The woman, a cancer sufferer, is “being pursued by HMRC on her hospital bed”, he says.

So many people do not have the resources to pay loan charge related bills that the Treasury and tax office must “get round the table” with affected people and come up with another solution McCann, the former HMRC inspector, believes.

“After all this time and the money that’s been spent and all the heartache that lots of people have suffered . . . despite all the bad press and the suicides, HMRC have managed to settle just 15,000 people,” he says.

Getting the next 10,000-15,000 people to settle will be even harder, he warns.

What does HMRC say?

Treasury ministers and HMRC’s leadership have consistently defended the department’s approach to administering the loan charge.

At the parliamentary debate in January, Treasury minister Nigel Huddleston said the government had recognised the loan charge as originally drafted “was disproportionate to its aims” and had therefore commissioned the Morse review and accepted almost all of its recommendations. He said that the government was aware of the “personal and emotional impact of the loan charge” on constituents, adding “this is something that I, the government and HMRC do take very seriously”.

HMRC had referred itself to its watchdog after each suicide linked to the policy and conducted internal investigations after each referral. Nine out of 10 of those investigations had concluded, Huddleston said, and “no misconduct was found”. However, he said HMRC was strengthening the support provided those who needed extra help.

Harra, HMRC’s chief executive, has also staunchly defended the department’s approach to the loan charge. He recently wrote a 17-page letter to MPs on the Treasury Committee, responding to various questions and concerns they had raised including on HMRC’s action to tackle scheme developers.

“We recognise that undergoing an HMRC investigation and facing a large tax bill can be stressful, and we aim to treat everyone sympathetically. Our staff are trained to recognise when someone is especially vulnerable and needs extra support. We do not accept claims that we have been deliberately heavy-handed,” Harra wrote.

He stressed that the tax office relied on affected individuals to engage with it, writing “we do need taxpayers to work with us”.

Harra added: “We contact taxpayers with continued offers of support, but there is only so far we can go if taxpayers do not engage with us. HMRC must do what it can to collect the tax that is due to ensure fairness for all other taxpayers.”

HMRC told FT Money it appreciated “there’s a human story behind every unpaid tax bill and we take the wellbeing of all taxpayers very seriously”.

“Our message to anyone who is worried about paying what they owe is: please contact us as soon as possible to talk about your options.”

Will it be resolved?

Campaigners who have criticised the Morse review for its limited scope and queried its independence are pushing for a new review into the loan charge, after the general election.

The Labour party, who are riding high in the polls, has expressed an interest in implementing one, if elected. Shadow Chancellor Rachel Reeves, told LBC radio in February a Labour government would introduce an independent review.

Members of the Loan Charge Action Group have called on a potential future Labour government to make sure any review looked at the “whole scandal”, including the role of scheme developers, umbrella companies, recruitment agencies, accountants and tax advisers who recommended the schemes, as well as the conduct of HMRC and the way it conceived the loan charge and presented it to ministers.

Meanwhile there is also increasing disquiet among tax professionals about the continuing saga. Some feel there are echoes of the Post Office scandal in the way individuals have been pitted against the might of the state. More than 65 tax accountants and lawyers have publicly backed an alternative resolution to the loan charge.

“If people really understood how horrible [the loan charge] is, there would be a groundswell that we can’t let this happen again,” says Waqar Shah, partner at law firm Kingsley Napley. “Whatever way you look at it, it doesn’t look right.”

Gabbai, who is looking to retest the alternative settlement proposal she has led with Labour as well as the current government, is clear about the risks of nothing changing.

She says: “We will just end up having more tragedies. How many more tragedies is it going to take before the message gets through? It’s just completely unsustainable.”