Loan charge - do these people want sympathy?

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Came across this article on BBC news this evening:
https://www.bbc.co.uk/news/business-54604132

John is not his real name but he didn't want to be identified. After all, he has spent more than two years keeping his financial worries hidden from his wife.

He is one of an estimated 50,000 people who have been hit by a controversial tax policy known as the loan charge. As a result, he now owes £180,000 to HMRC.

The pressure of the last two years has been enormous. He told BBC Radio 4's File on 4: "It's really tough. I can't tell you the last time I slept and it's difficult. It's just relentless, with no real end in sight."

This substantial tax bill stems from how John was paid when he worked as a contractor for a number of years.

He used a company to manage his admin and also his tax affairs. It promised him he could take home 85% of his earnings and still be compliant with UK tax law.

A number of different companies offered these tax schemes. Workers would be paid a small amount of salary as a standard, taxable income. Then they would receive a larger payment as a loan via an offshore trust.

Only a very small amount of tax was paid on these loans and there was no expectation they would be repaid. The government has closed this loophole and used the loan charge to demand large sums in backdated taxes from the freelancers and contractors who used them.

The policy effectively adds up third-party loans paid since 2010 and taxes them as income. This has meant substantial bills for many workers.

The story reads as though the guy wants a bit of sympathy. I'd guess that he was a fairly intelligent bloke being a contractor, and would guess that he would have sat in the higher tax bracket, or even the additional tax bracket.

So I do wonder what happened to his intelligence when he thought he'd get away with tax avoidance and paying just 15% tax. Whilst the rest of us have to pay 20%/40%/45% tax on our earnings.

I agree with his point that the government should also go after these companies that promote these tax avoidance schemes, but I do hope he's held to the debt and made to pay it off.

I find it rather laughable that he claims he's not a tax dodger.

 

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Contractor automatically equals intelligent?

A painter and decorator can be a contractor. A Gardener can be a contractor. (not saying any of those trades require you to be stupid just highlighting that the OP thinks Contractor equals High intellect)

However many people have been sucked into schemes like these often via their accountants.


Also, Tax avoidance is perfectly legal
Tax evasion isnt

Do you have an ISA?


Edit: Not read the article, Just responding to OP

I do get your point about trades also being referred to as a contractor. But having read the article, I think it's a safe assumption that this guy was contracting in a professional role.

I never claimed tax avoidance was illegal, just that he surely would have known that something wasn't quite right about the amount of tax that was being paid.

An ISA is completely different, this is a fully documented and supported route of earning interest tax free. In most cases the money going into the ISA has already been subject to tax.

 

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This is the sort of arrangement i'm referring to - these people wouldn't have known whether they were paying 'little tax' because they were effectively led to believe there was nothing especially unusual going on. As I said though, this represents a minority, there is definitely a large group out there who knew exactly what they were doing and can't be surprised that the issue has eventually caught up with them.

The cynic in me still doesn't believe that to be the case. Most of the people using these sorts of arrangements will have at least been in the 40% tax bracket, as the scheme doesn't really seem that beneficial for those in the 20% tax bracket. Would they not have found it a bit strange that friends/acquaintances would have been paying significantly more tax based on similar earnings.

should have put the tax savings aside into liquid investments if you're going to play a silly game like that.

Exactly this. Nothing to do with these loan charges, but i know of a family member who'd got a big payout from redundancy and the amount of tax owed somehow got a bit messed up - i think it was about 7-10k that didn't get paid in tax. They put it aside in another account, and a few years later HMRC did come knocking.

 

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Makes things easier for who? HMRC already know who these people are. Many have open enquiries. I ask the same question yet again:

If the tax was always due, why have HMRC waited years, decades even, to try and collect it? Why do they need the 2019 Loan Charge?

I don't work in the industry so the following is just my opinion.

Even though loan charges were not "illegal" they were not "legal" either, which places them into a bit of a grey area. It still comes down to the principle though that individuals who used these types of schemes did so knowing that they were reducing their tax burden which is tax avoidance plain and simple, but because these schemes weren't "illegal" it couldn't be classed as tax evasion.

Having the 2019 loan charge probably gives HMRC more of a footing to go after these people compared to before. Either way i don't see how it makes any difference, and as a normal PAYE taxpayer, frankly i don't care. I feel these people have gotten away with reducing their tax burden for too long, and they should be held accountable for paying their fair share.

 

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If something is not "illegal", then it is legal. By definition. In matters of tax, it's unlikely anything would be illegal - unless there was a deliberate withholding of tax (i.e. evasion). I.e. there will not be any criminal penalties for a scheme which does not work. There may be financial penalties, interest, and of course the tax will be due. But criminality is a high burden, so there's little point in implying criminality to any of these arrangements (not saying you were). In any case, if criminality was occurring, then the scheme promoters would also be on the hook. Most of whom are wealthy individuals and have political connections, so (it seems at least) the radar is deliberately being kept away from them.

One part of me does tend to agree with your sentiment - why should these people be allowed to get away with paying less tax. However, another part of me says that every individual is entitled to reduce their tax burden. As a Ltd company contractor for many years, I certainly did so (by paying dividends instead of PAYE). Now I have been PAYE for a number of years, it does annoy me as well that others are able to pay less tax. But we all make a choice - and being self employed comes with it's own risks/rewards. The politics of envy is what HMRC rely upon when targetting a particular set of people. The one thing which we should all be mindful of - today it is them, tomorrow it could be me.

There are also a whole spectrum of people involved in using these arrangements. I don't know what the demographic is, but I do know innocent people have been duped or enticed into using them (rightly or wrongly). HMRC should shoulder some of this responsibility through their inaction over decades. Why is the only person paying the price the individual? It's the unfairness of a corrupt system which enrages me. It'd be easy to say they deserve it (maybe they do) - but there's lots of others involved who are getting off scot free. That I dont agree with.

I don't think things are quite as black and white as if it's not illegal it must be legal. There's a lot of grey area inbetween and laws are regularly being updated to make these grey areas more black and white. But i agree, and i did add in my opening post that the government should also hold the companies/individuals who set up these schemes to account. But i think as other posters pointed out, a lot of these companies set up and vanish in a short term, and it'll likely take considerably more resources to hunt down these individuals than going after the low-hanging fruit.

However, another part of me says that every individual is entitled to reduce their tax burden.

I think this is a big part of the problem is that the mindset of a lot of individuals is to get away with paying as little tax as possible. I would strongly hazard a guess to say that the majority of people have very few ways of minimising their tax burden, so it's not fair to expect them to pay a larger burden of their share than others. I was quite smug when the chancellor had announced the furlough scheme wasn't going to compensate directors dividend payments. There was quite a number of unhappy directors who'd been getting away with paying minimal tax via max personal allowance + dividends, and basically wanted their cake and to eat it.

The unfairness of a corrupt tax system enrages me too. In an ideal world everyone would pay their equal share, regardless of employed/self-employed, how they're paid, the opportunities to reduce an individuals tax burden would be equal to everyone. Unfortunately it's a very old complicated system, and there's too many rich and powerful people who have more to lose by moving towards a more equal version.