The loan charge is ruining lives and failing to stop 'dodgy umbrella companies', leading MP warns

Greg Smith MP, Co-Chair of the APPG said: "It’s a scandal that HMRC are only pursuing those mis-sold these schemes and not those who profited from mis-selling them."

Mr Smith also said the controversial loan charge, which was recently the subject of a Parliamentary debate, has completely failed in its objective, “because as well as ruining lives, it has failed to stop dodgy umbrella companies and the mis-selling of schemes, which is still happening”.

During the debate last month, MPs called for a fair resolution and full independent investigation into the loan charge, a controversial tax policy which has affected an estimated 60,000 people and been linked to 10 suicides.

The loan charge was designed to tackle tax-avoidance schemes where individuals receive income in the form of loans that are not repaid to avoid income tax. Critics claim the policy is punitive because it has left honest people who acted on professional advice with life-changing tax bills.

Chris Bryce, the Chief Executive of the Freelancer & Contracter Services Association, said: “FCSA has, for a number of years, called on Government to bring forward regulation which regulates the umbrella industry.

"We have worked closely with various government departments including Department for Business and Trade, HMRC and Treasury and have suggested numerous areas which would benefit from well-formulated regulation. Until that happens, we continue in our efforts to raise the standards of the industry as a whole and we have and enforce strict codes of practice for our members. We have, on many occasions, notified HMRC of companies who purport to be offering umbrella employment but are, in fact, offering schemes or scams.”

Mr Bryce said he “cannot stress enough” that no legitimate umbrella would ever offer umbrella employees anything other than straightforward fully-taxed PAYE employment.

He added: “Any company claiming to operate as an umbrella employer and then offering anything other than PAYE isn’t really an umbrella company.

“None of the dodgy schemes are lawful and almost all of them risk leaving the worker with a hefty tax bill. The scandal here is that the perpetrators of these schemes, which are often accompanied by convincing KC’s Opinions available only after signing an NDA and quite often quoting an HMRC DOTAS number as a badge of honour, have largely gone unprosecuted by the authorities. They are often based offshore or in tax havens such as the Isle of Man or are otherwise untraceable.

"In my view it is extremely unfortunate that the workers themselves have been pursued for unpaid taxes whereas the scheme promoters, who made money from these schemes, seem to be left untouched. FCSA’s codes of practice forbid use of any of these schemes and our advice to workers is clear: no matter how attractive or well-promoted do not touch these schemes with a bargepole. Do a simple sniff test – is the so-called umbrella offering anything other than full PAYE? If so, walk away. FCSA has huge sympathy for those caught up in the loan charge, which has resulted in terrible strains being put upon individual taxpayers and I personally have called upon government to tackle the grave issues raised by it.”

A woman who said she had a negative experience with one umbrella company told The Yorkshire Post: "My concern is that the umbrella sector remains an unregulated industry at a time when it is incredibly easy to unwittingly sign up with umbrella companies which aren't legitimate. A lot of the dubious umbrella companies have very similar names to the legitimate ones, which adds to the confusion.

"Tax may not be being deducted properly, which means you may get a big tax bill in the future. I was with an umbrella company for just a few months until my suspicions were raised by a call from a representative of the umbrella company who told me I had been enrolled in a share scheme. It sounded odd. I then read an article which stated that umbrella companies weren't just associated with the loan charge; other schemes associated with them were potentially dodgy.

"I ditched them and switched to another umbrella company. Two years later, I got a letter from an Isle of Man address stating that I would have to declare capital gains. I didn't understand what they were talking about. I wrote back to them to query it but never got a reply.

"I have no idea to this day if it was legitimate.

"The suffering caused by the loan charge has been horrendous. I know quite a few people who have been stung by the loan charge.

"People are getting sucked into schemes that claim to be HMRC compliant and have been recommended by their accountant. I mean why wouldn't you trust your accountant?”

Steve Packham, spokesperson for the Loan Charge Action Group said: "The Loan Charge and the whole approach from Government is unfair, demanding unaffordable sums from workers, whilst not seeking a penny from those who made millions mis-selling these arrangements or recommending them.”

A Government spokesperson said: “While it’s important to give companies flexibility over how they hire the staff they need, it’s vital that we protect workers from any behaviour that doesn’t meet our strict employment rights and tax laws.

“That’s why we launched a consultation to review how we regulate umbrella companies and what further measures we can implement to tackle non-compliance. We will publish our response soon.”

The consultation, jointly launched by HM Revenue and Customs, HM Treasury and the Department for Business and Trade, closed on August 29 2023.

The statement added: “HMRC has published guidance on working through an umbrella company to help contractors who may be working through one for the first time.

“There’s no evidence that a significant proportion of those affected by the 2021 off-payroll working (OPW) reform have moved to working for non-compliant umbrella companies operating tax avoidance schemes.

The statement added: “In December 2022 HMRC published its analysis on the impacts of the OPW reform, which showed over 99% of those affected by the reform did not join a company offering a disguised remuneration scheme.

“Before the 2017 and 2021 OPW reforms, there was wide-spread non-compliance with the rules, with only one in 10 Personal Service Companies estimated to be complying with them.

“These reforms have succeeded in improving compliance with the off-payroll rules and have already brought in an additional £1.8bn that was due under the law.

“Many umbrella companies operate within the rules, but we will not hesitate to challenge those that are used to carry out tax fraud and avoidance.

“The estimated tax gap from marketed avoidance sold primarily to individuals, has fallen from an estimated £1.5 billion in 2005-06 to £0.5 billion in 2021-22.

“HMRC is squeezing hard-core promoters of mass-marketed tax avoidance schemes out of the market; reducing supply and demand by informing and educating taxpayers through their “Tax Avoidance – Don’t get caught out” campaign as well as directly challenging the promoters. A handful of avoidance promoters remain but HMRC are determined to drive them out of business.

“As of the end of 2023, HMRC has published the details of 59 promoters, 23 directors, and 64 tax avoidance schemes, undermining their practices and helping protect thousands of individuals.

“HMRC has also issued 23 stop notices between August 2022 and the end of December 2023, legally requiring a promoter to stop promoting a tax avoidance scheme.

“The current Finance Bill is introducing tougher consequences for promoters of tax avoidance. This includes a new criminal offence to strengthen the deterrent to promoting tax avoidance, making it clear promoters must stop peddling these schemes, and a power enabling HMRC to act more quickly to disqualify directors of companies involved in tax avoidance.”