Contractor loan/loan recall issue – FAQs

What is the issue?

Some individuals are being contacted about the recall of a loan, that originated in a disguised remuneration (DR) scheme (more on this below), by organisations (or their solicitors) that now claim to own or control the loans.

These organisations, who are sometimes based offshore, such as in the Isle of Man, may be liquidators of the original loan providers or, as seems to be more common, claim that:

• the original provider of the loan scheme has sold their book of ‘loans’ on (indeed, it may have changed hands several times already before falling into the hands of the current organisation);
• the loans are legally valid; and
• can be collected by them.

This is happening even though HMRC regard the loans as taxable income called ‘disguised remuneration’ and the individual has probably paid the loan charge or has come to a settlement agreement with HMRC on the outstanding tax.

We have been contacted by individuals who now find themselves in this distressing and stressful situation and who are already struggling financially as a result of settling with HMRC or paying the loan charge.

Recently, one organisation that has purchased a range of loan books, claims to have won its case in the County Court against a ‘debtor’ they had issued a Statutory Demand to. This success is likely to mean that more Statutory Demands will be sent out as a consequence (more on this below).

What is the background to this?

In the last few decades, loan schemes have been used by employers and individuals in an attempt to reduce the amount of tax and NICs due to be paid. Tax benefits arose, in theory at least, because the loan was not treated as part of the worker’s employment income.

In some cases, we have come across, the individuals involved were not aware of any loan arrangement. However, where they were aware of the loan arrangement, they seem to have been assured the loan would not have to be repaid. This reassurance was likely to have been given verbally and the actual paperwork signed may have indicated the loan was repayable – in order to help the scheme organiser argue it was a loan and not earnings. It would of course make no sense from the individual’s perspective to agree to a repayable loan in place of earnings – as it would effectively mean they were working for very little.

On the basis that these loans were unlikely ever to be paid back, HMRC said the money was no different from normal employment income and was therefore taxable. They brought in the loan charge to clamp down on these schemes. Under the loan charge, people had to pay employment taxes on any loans paid between 9 December 2010 and 5 April 2019 unless action was taken to ‘settle’ beforehand.

The ‘loans’ were often channelled through trusts, run by professional trustee organisations. However, given the increasing financial and reputational considerations of offering this service (trusts are expensive to run and the loan charge is very controversial and has caused some furore), it would appear some trustees have sought to pass the loans on by appointing new trustees and/or by selling their ‘books of loans’ to third parties.

Third party assignees, having paid pennies in the £ for the loan books, then seek recovery of the underlying loans.

Not all loans have been sold in this way.

What is in the letters?

Most of the letters we have seen are from one organisation that has purchased a range of loan books, however we are aware of other organisations sending similar letters.

Initially, their demands seem to have been for one-off payment in return for a complete write off of the loan (for example 5% of the balance, with an administration fee on top). This seems to have been triggered by the notion that HMRC ‘required’ a loan write off for IHT purposes before agreeing a settlement (you can read more about the IHT implications of contractor loans here but in a nutshell this was because HMRC’s settlement terms typically included payment of any IHT arising from the write off (this being an occasion of property ceasing to be held on discretionary trusts)). HMRC stated in Spotlight 48 that this was not their position.

However, the organisations clearly saw an opportunity and the demands have continued and evolved – with demands now not just for a % of the loan but for full repayment and then, also with interest added/accruing.

Other letters we have seen include informing individuals of the change in ownership of the loans and inviting them to send certified identity documents as part of an ‘onboarding process’ and/or to view the documents that the organisation hold online evidencing the veracity of their claims (we understand that individuals need to provide certain personal information in order to access the online repository). As a general principle, you should think very carefully before responding to such requests as you may be exposing personal details or information about your situation that the organisation do not currently hold.

We are aware of at least one organisation that has started issuing ‘Statutory Demands’ (see below) to some of the people it says owe them money. Recent letters to individuals claim that they have had some success in enforcing their position this way. We are also aware that the organisations may still periodically offer to ‘settle’ at a much-reduced cost (for example 10% plus an administration fee), while still preserving its right to enforce the full debt should negotiations ultimately fail.

Either the letters come from the organisation directly, or their solicitors.

What is a Statutory Demand?

A Statutory Demand is a formal demand made by a creditor for payment of an undisputed debt of at least £5,000. They are usually used to pave the way for bankruptcy proceedings, because properly used, a Statutory Demand is a way to prove that an individual cannot pay their debts and is therefore insolvent. The next step would be for the creditor to initiate formal insolvency proceedings by presenting a bankruptcy petition.

Statutory Demands are not supposed to be used as a debt collection tool where the debts are disputed. However, the process for issuing one is quick, cheap and easy, so sometimes Statutory Demands are used as a tool by creditors to try and recover debts they say they are owed.

If you are served with a demand, you should act quickly. We strongly recommend you seek specialist legal advice as soon as you can (more on this below). Usually, recipients of a Statutory Demand need to contact the organisation that is claiming that money is owed and state that the debt is disputed, set out why it is disputed and ask them to withdraw the Statutory Demand. If they do not withdraw it, then an application to a court is needed to get a demand set aside – there is a strict 18-day time limit for this application. The Statutory Demand should tell you how and where you should apply to set it aside.

You can find more information about Statutory Demands on GOV.UK. You can find step by step help on how to complete the forms to dispute a Statutory Demand on the Citizens Advice website.

If you do not dispute it (or you do not dispute it properly) and it is not set aside by a Court following an application made by you within 18 days, then this paves the way for the organisation to initiate insolvency proceedings. Even if they don’t actually do this, this obviously leaves them in a powerful position.

If it is set aside, then you should note that this does not create any kind of ‘precedent’ for others to follow. It also does not mean that the organisation will go away – the setting aside is merely recognition that there is a genuine dispute – the underlying issue will still need to be resolved.

Can they do this?

This is a very difficult situation – very simplistically, the effect of the loan charge is that the loans are taxed as income, however for other purposes, it is quite possible that any documents signed, or terms agreed to, on the face of it at least, created actual loans in law.

This is a highly technical, legal area and therefore strictly outside of our area of expertise as it is no longer a pure tax issue. However, we and TaxAid, continue to be contacted by people facing these demands.

LITRG have spoken with several prominent experts in this area, who have given their time freely and to whom we are very grateful. Although the situation is by no means straightforward, assuming the organisation can prove they own the loans, we understand there may be ways that the demands from the new loan owners could potentially be challenged.

They are all very technical legal grounds, but the most intuitive one perhaps, is a kind of substance over form argument - that there is no actual loan – the intention of the parties at the time the payments were made, was not to create a loan with long standing obligations, it was to create a way of being remunerated in a ‘tax efficient way’. Therefore, any payment out of the trust was a payment of remuneration contractually due to the individual, not the advance of funds on loan.

We understand there are also other, esoteric arguments that could be made based on a breach of trust law (which arguments, exactly, are relevant will depend on the terms of the trust from which the loans were made in the first place).

We appreciate that few people will be fully versed in the complex law involved and may also be unable to afford legal advice, hence this article. There is a less obvious issue in that this is such an unusual situation that cuts across several different areas of law (tax, trust, contract etc), that even if you can afford legal advice, it is likely to be needed from a specialist (as opposed to a generalist high street solicitor for example), in order that they can understand and articulate your case properly.

What should I do if I receive a letter or Statutory Demand?

This is a very difficult and sensitive subject – your instinct may just be to ignore the organisation, on the basis that that the money was ‘pay for work done’ and you were given the impression that the sums would never be recovered. If you have already paid the loan charge, or settled with HMRC, this may reinforce your view.   

You may hope that the organisation will ultimately ‘go away’, that the situation is so straightforward that if it was properly tested in court, that it is inevitable that it will be thrown out, or that the debt is non-enforceable as it is statute barred.

However, unfortunately, it is not that clear-cut and these debts may not be statute barred, as while sums may only be recovered within 6 years of the debt arising, the clock will probably only have started counting from the date the organisation first requested repayment (not the date the loans were originally made).

The risk of not taking these letters seriously is that an organisation may issue a Statutory Demand to try and ‘force’ you to deal with it, which a Judge may refuse to set aside if you have not taken steps to defend it properly. A Judge can only make a decision based on what is put before them.

A Judge finding for the organisation, essentially in default, will obviously be very unfortunate. It could be hugely costly in itself and may also mean that the organisation will be able to add their legal costs on top of the ‘debt’.

Our strong recommendation is that you do not ignore the letters – particularly a Statutory Demand. You should immediately get all of your paperwork together and take specialist, independent legal advice – it may not be as difficult to find or as costly as you think (see more below). You should do this quickly and you must ensure you do not miss any time limits.

How do I find appropriate legal advice?

There is some guidance on finding a solicitor on the GOV.UK website. As explained above, given the need to find different strands of legal expertise as explained previously, all under one roof, you may need to seek out a specialist, national or city firm.

There are some tax and legal consulting firms with specialist contractor loan knowledge, who are assisting individuals affected by this situation. The specialist tax and legal consulting firms are discussed at length in the Contractor UK forums we link to below.

Some of the firms appear to be representing large numbers of people in a similar situation - which means that they may be able to assist you for a relatively small flat fee.

We are not in a position to endorse or recommend any of the firms discussed and suggest you thoroughly research all your options, however we can provide the following pointers to help you in your research:

• Check that any firm is a member of an appropriate professional body (such as the Law Society or the Chartered Institute of Taxation)
• Check if they are still accepting new entrants into their ‘groups’, that they will carry out the work for a fixed fee and what that fixed fee is.
• Check if they will offer you a half hour free consultation to discuss your case and how they may be able to assist – many good firms will do this.

I can’t afford advice – what should I do?

Unfortunately, if you cannot afford to pay for advice and cannot find someone willing to act for you on a pro-bono (free) basis then you may have to deal with situation yourself.

You need to comply with any deadlines in the various letters. You should gather any paperwork that you have. If you dispute that the debt is due, you should try and collect evidence to support that. For example, if you consider the amount was not a genuine loan because you thought it would not have to be repaid, copies (not the originals) of any paperwork or email evidence that you have showing that you were told the money was to remunerate you and was not a proper loan (for example, as it carried no interest/was not secured/not repayable etc.) should be forwarded to the organisation.

Contractor UK threads such as those here and here, can be a rich source of information as to how to tackle the issue (however you should be aware that there are a huge number of posts to wade through – some are people simply venting, some contain speculation as to whether or not letters are genuine, or part of a scam and lots of them contain well-meaning but possibly misguided advice as to what to do, which you will need to sift out).

Make sure you keep a log of all communications with the organisation or their solicitors.

You may wonder whether you could seek assistance from a charity. While TaxAid can help those on low incomes with dealing with their tax affairs, which can include loan charge issues, this is an issue which requires legal advice, which unfortunately TaxAid is unable to provide. 

Free legal advice can be obtained from a Law Centre or Citizens Advice, however given the complexity of the topic, we do not know what level of assistance these organisations can provide, although they may be able to help you dispute a basic Statutory Demand.

Who else should I contact?

If the organisation is based in the UK, undertakes ‘regulated activities’ and you think their request is not valid or they do not appear to be following professional standards, then you can get advice by contacting the Financial Conduct Authority.

If the organisation is based in the Isle of Man, you may wish to contact the Isle of Man Financial Services Authority who are aware of the situation and who, from a statement they have made, appear to be monitoring the situation closely.

They are a government body responsible for the financial integrity and reputation of the Isle of Man. Although they may not be able to help individuals directly, making a submission to the body allows it to gain a picture of the potential harm being caused to the Island. The Isle of Man Financial Services Authority recommends that individuals take any complaints they may have in their personal capacity, to the Isle of Man Office of Fair Trading.

In terms of any UK-based solicitors that may be working for the organisation who is seeking the debt from you, if you think they are not following professional standards, you can report them to the Solicitor’s Regulatory Authority.

Given this situation is likely to exacerbate the stress and anguish that many contractors affected by the loan charge are already experiencing, you may want to contact the Loan Charge Action Group, which provides support and advice to individuals affected by the policy. We have no links to the organisation, but you may want to look at their website and contact them to tell them of your experiences and make sure they are aware of the situation.

What are HMRC doing?

HMRC say that while they are concerned to hear about the arrangements, whether the loan is repaid is matter between the individual and the loan owner. HMRC does not have the statutory power to take up disputes between the private parties.  

Legislative change would be needed through Parliament for HMRC or indeed any other body, to be able to get involved with this situation. Contacting your MP is therefore the right first step to highlight the issue.

LITRG have already stated that we feel there is more that should be done by government to ensure that where the amounts are treated as remuneration (for tax purposes), because that really is the nature of them, they should not also be treated as loans for other purposes.

If I pay the loan back, can I get a refund of the settlement amount or the loan charge?

You may feel that you just want closure and to pay the organisation – particularly if they are offering you the chance to ‘settle’ for a % of what they claim is outstanding.

However, you should make sure that you understand what affect any subsequent ‘write off’ of the loan would have on your tax situation (see question below).

HMRC have previously stated their position that any repayment of loan capital would not reduce the balance for settlement. Equally, any repayment of loan capital after 5 April 2019 will not reduce the amount of the loan charge.

This means that even if you do pay some or all of the loan back to an organisation by way of ‘settlement’, HMRC will not waive the loan charge, refund any loan charge that has already been paid or unwind a settlement agreement.

What should I be aware of if I pay for the loan to be written off?

If the loan is written off following your ‘settlement’ with the owner, there may be tax consequences.

As many of the loans were originally advanced to contractors on the basis that tax was deferred until the loan was written off, the disguised remuneration rules (ITEPA 2003, Part 7A) result in the write-off of a loan being a taxable event (as described in HMRC’s guidance at EMI46105). 

Although writing off an outstanding loan may mean there is more tax to pay, there are double taxation relief provisions, which mean that any tax paid under a settlement or the loan charge is available to 'frank' the subsequent charge. 

Because HMRC will not seek tax twice on amounts of income that overlap more than one tax charge, in reality, this issue will be mainly a consideration for those with pre 9 Dec 2010 loans (who are not subject to the loan charge and who may still be trying to argue that there is no liability) and those, following the Morse review, who chose not to continue to settle for voluntary restitution.

If you have settled or are subject to the loan charge (and have probably paid it/are in the process of dealing with it), you should have the double tax protection if there was a subsequent write off.

Note: there can also be inheritance tax ‘exit’ charges if/when a loan is written off, as there will be a transfer of value out of the trust. Under normal circumstances, exit charges are payable by the trustees, but in some circumstances, HMRC can seek payment from other people who were involved with the trust, instead. If the loan is written off and the IHT position hasn’t already been considered by HMRC, there is a risk that HMRC will seek recovery of any charges from you. HMRC does not accept that, simply because the loan has been reckoned for income tax purposes, that there is an exemption from the IHT charge. Saying that, in most cases, although IHT could be due, there will be none to pay or it will be modest.