Contractor Loan Scheme Scandal: MP Calls for Inquiry

Thousands Face Crushing Tax Bills After Following “Disguised Remuneration” Advice. Radio presenter Mariella Frostrup brings this harrowing dilemma to the wider public’s attention

This week Times Radio presenter Mariella Frostrup spoke to Greg Smith, Conservative MP for Buckingham and co-chair of the Loan Charge All-Party Parliamentary Group, about the growing scandal surrounding contractor loan schemes and the negative impact IR35 is having on economic growth..

The schemes, which were widely promoted to contractors as a way to reduce their tax burden, have now left thousands facing enormous tax bills and, in some tragic cases, financial ruin and even suicide.

Smith explained that the loan charge, introduced in 2016, “turned the tax tables on a lot of people” by making them liable for taxes that should have been paid by their employers or the promoters of the schemes.

He estimates that around 60,000 people in the UK are affected, many of whom were following professional advice at the time.

“They were left in a situation where they’d taken professional advice, they had listened to advisors that probably any of us would listen to… turns out they weren’t [legitimate],” Smith said.

Frostrup asked: “Why would individuals have been made responsible for payments that should have been made by employers? I mean, it seems a strange piece of legislation, if you don’t mind me saying.”

Smith replied: “It’s a classic bit of HMRC going to the low hanging fruits because the tax man knows that going on off an individual rather than a larger entity is potentially the easier way to do it. But it’s totally taken out all humanity from the process.”

Calls for Transparency and Fair Settlements

Smith criticised HMRC’s approach to the issue, accusing them of lacking transparency and treating the victims with a “lack of humanity.”

“There are actually some examples… I’ve heard evidence from victims of the loan charge where they break down to tears very easily. They talk about having lost their homes, lost their marriages over the stress involved in it,” he said.

He called for a full public inquiry “that doesn’t just take HMRC’s word for it” and which would include speaking to the affected individuals.

“We need to come back with a new scheme that looks at a fair ask and a fair settlement,” Smith said.

Reform Needed for Freelancer Taxation

Smith also pointed out the wider issue of the tax system’s treatment of freelancers and the self-employed.

“IR35 [legislation designed to prevent false self-employment]… the way it was introduced and the enforcement of it just doesn’t work for a lot of freelancers,” he said.

Smith concluded by calling for a reform of IR35 and a review of the tax system for the self-employed, “that rewards entrepreneurialism in the tax system rather than this case, which simply punishes it.”

We need to ditch off-payroll

Commenting on the points raised in the interview, Dave Chaplin, CEO and founder of IR35 tax compliance firm IR35 Shield said: “The IR35 Reforms aren’t working the way they should for many reasons.”

Chaplin explained why the process is overcomplicated and needn’t be:

“Firstly, firms are asked to make determinations without access to the full set of information they need to make an accurate decision. Secondly, HMRC is adopting a view on status that is contrary to the law. Thirdly, firms are making decisions based on risk, rather than status. Fourthly, the statute is horrendously complicated making enforcement for HMRC harder than it was under the pre-reformed regime.” 

Chaplin also criticises decisions made by individuals within HMRC:

“In some areas of HMRC, individuals appear to have adopted their own personal “maximum tax” approach to collection, as opposed to the “correct amount of tax” approach; such behaviour sits firmly in the abuse of power zone.  HMRC must be held to account and its bad policing problem addressed so that we can move to a tax system that works fairly for all its taxpayers.

“We need to ditch Off-payroll, and go back to a reform of the original rules. There are some very simple changes that could have been made that would have raised tax, without ruining the flexible workforce as Off-payroll has done. The reforms are a disaster, and need cancelling.”