It’s a rare day when a letter from the tax inspector brings good news.
But for thousands of freelancers and contractors caught out by HMRC’s loan charge, the contents of those dreaded envelopes have been nothing short of devastating.
The loan charge – thought to affect 50,000 people in the UK, mainly from the IT industry – came into play in April. It hits workers who were sold so-called disguised remuneration schemes by umbrella companies as far back as 1999. Although many involved are edging to retirement, plenty of workers in their 30s are affected, too.
It's a cautionary tale for freelancers in the gig economy who might be sucked into similar schemes that promise the world (or at least a smaller tax bill).
Umbrellas operate as intermediaries – they employ temp workers hired through recruitment firms and, for a fee, take care of payroll, sparing the headache of doing your own tax return. But many offered – and still do – a tax-planning element. This is what so many freelancers and contractors have fallen foul of.
Umbrella loan schemes operated like this: workers were paid via their umbrella which split their money into two portions – a small, taxable salary and a supposedly tax-free loan. It meant even big earners well into the higher tax bracket were bagging 85-90 percent take-home pay, with umbrella operators taking a chunk of the remainder.
If this sounds too good to be true, guess what? It was.
Loans are non-taxable – as long as they are repaid. But these never were. Although the schemes were legal at the time, HMRC now says – in a move criticised by anti-loan charge campaigners as a retrospective moving of the goalposts – that these loans were in fact tax avoidance.
Now the Treasury wants its cut, estimated to be worth around £3.2 billion. The change of heart means some of these workers – not only high-earning programmers but also doctors, nurses and social workers – feared selling their homes or filing for bankruptcy to settle tax bills for tens, even hundreds, of thousands of pounds.
Adam, 35, a software developer, is one of them. He owns a one-bedroom flat in London with his 42-year-old partner, who also works in IT. The couple would love to give their 19-month-old son a baby sibling – but with the tax man’s doom-laden axe hanging over them, life is on hold.
“Every time I see a brown envelope, my heart stops,” Adam says. “HMRC’s letters are always very heavy-handed, you’re basically made to feel like a criminal. You’re a pariah.”
We know what you’re thinking: it’s hard to muster sympathy for a cynical interpretation of tax legislation that lets someone keep 90 percent of their salary while the rest of us pay our government-mandated taxes like schmucks. But that's until you realise the people running these schemes – often based in offshore tax havens like the Isle of Man – operate in an industry that is completely unregulated, and with total impunity.
Adam’s experience of getting involved with an umbrella scheme chimes with those of other contractors who spoke to VICE. Many used to work through their own limited companies, taking advantage of the associated tax breaks to offset the lack of employee benefits like holiday and sick pay. But when new tax laws were introduced in 1999 to clamp down on the limited company model, they jumped ship to umbrellas.
"I was told my scheme had been going for 24 years, and was shown a letter from a tax law barrister to back it up,” says Adam. In 2016, he received an inquiry letter from HMRC. “It sounded like a random check,” he says. “My umbrella told me there was nothing to worry about.”
The worry set in a year later, around the time Adam’s partner fell pregnant. When he picked up on adverse publicity about umbrellas and tax avoidance, he quit his scheme. While his umbrella dissolved, the threat from HMRC became ever more menacing. Adam expressed an interest in settling with them in September last year, and in March was offered a deal: pay £90,000, or we'll come after you for double that.
“I got the first letter just as my mum was going into hospital, and she died a few weeks later,” Adam says, choking back tears. “I was terrified to tell my partner, I just didn’t want to admit what was going on. I was being labelled a tax dodger, with all the stigma that goes with it – that you’re just getting what you deserve.”
Adam says his partner was “devastated” when confronted with the reality of their situation: paying HMRC £1,000 to £2,000 a month for the next six or seven years to settle his debt.
“We don’t have any savings,” he adds. “Maybe we could manage it, but life is already very uncertain and this would make things even tougher. “If I agree to settle, that’s it – we’re legally bound to pay up. I’m holding out for as long as I can in the hope of a change of heart at HMRC.”
In June, 200 MPs signed an open letter calling for HMRC to suspend the loan charge and hold an independent inquiry. Together with LCAG – the Loan Charge Action Group – an All-Party Parliamentary Group (LCAPPG) has been campaigning to highlight the effect of loan charge demands on mental health.
Five suicides have already been reported to LCAPPG, with HMRC referring itself to the Independent Office for Police Conduct over two cases. In heartbeaking testimony, one of the families involved recounted their experience for LCAPPG’s inquiry report, published in April. Referring to the victim’s suicide note, the family told the inquiry: “It was clearly written by a man who had been broken by the Loan Charge process....he wrote about his fear of going to prison, his disgust at himself for getting mixed up in the loan charge.”
An LCAPPG survey has revealed 40 percent of respondents have considered ending their lives, while 60 individuals said or implied suicide was a real intention as a "means of sparing their family the financial pain."
A Treasury subcommittee report published on Wednesday revealed that HMRC has now said it won’t make people sell their homes or file for bankruptcy to settle demands, but MPs criticised its approach to “vulnerable” taxpayers, saying it had caused “widespread anxiety”.
Thirty-five-year-old Alva, whose partner Hugo, 42, is still staring into an £80,000 loan charge void, sobs as she speaks to VICE on the phone: “He says he’ll never do it, but he wishes he could end it all. He gets into such a hole. He’s severely, severely depressed, constantly agitated to the point where he’s suffering from bone loss in his jaw through grinding his teeth with stress.
"Loan charge is the first topic of conversation every morning, and the last at night, and it’s there throughout the day. We don’t make plans because we don’t know what’s going to happen. I’m 35 and would love to be a mum, but it isn’t possible until this is sorted. It's so overwhelming, it takes over every thought.”
Hugo, an IT worker who was paid through a loan scheme for five years from 2007, says he has written over 100 letters to HMRC, suggesting that the responsibility for the tax debt should be split three ways between him, his umbrella and the government department itself.
“Absolutely nothing has been done to stop these schemes – they’ve effectively been sanctioned for two decades,” he says. “When all this came to light, it actually took me about 20 phone calls to find an umbrella that wasn’t offering some kind of tax avoidance.
“OK, I was naïve – I should have looked closer, but surely HMRC has to take some of the blame? I’ve lost so much of my life, and this is nowhere near concluded. HMRC has completely broken me. All I did was follow professional advice, but they’re going after individuals, not the people who created these schemes in the first place.”
In fact, Treasury Minister Jesse Norman was forced to admit this month in answer to a written Parliamentary Question that no scheme promoters have been prosecuted because, bizarrely, “there are no criminal offences specific to the promotion of mass-marketed tax avoidance schemes.”
In this culture of impunity, umbrellas touting tax avoidance rackets – all with worrying similarity to the now-discredited loan schemes – are still rife. VICE found umbrella promoters offering to pay our reporter through a variety of complex and artificial arrangements, including tax-free grants, and as an advance on the umbrella’s "end of year bonus pot".
Terry, 32, another IT contractor, feels like he is “starting from scratch again” after agreeing a seven-year settlement deal to pay HMRC £90,000, but says he is stunned by the Treasury’s casual indifference to tax avoidance promoters. “It’s like double-think,” he mourns. “If the promoters weren’t doing anything wrong in selling these schemes, how can HMRC come after me?”