In this Ian Spectre blog we tell the story of the Loan Arranger, a story about the Loan Charge which came into force in April 2019 which sees the Government applying retrospective tax charges for the past 20 years. If you’ve not been acquainted with our Ian Spectre character before, you might want to take a look at a few of his previous blogs.
NB: The content of this blog may be upsetting to some people. Please see the footnotes and please seek help if you have found yourself in a similar situation. While the content of this blog is based on real situations that our team have experienced, personal and business names have been changed.
2004
28 year old Simon Barton attended a meeting with Bob Renshaw at the offices of Warr & Co. Simon was a Computer Consultant who wanted to go freelance and had just secured his first contract. Bob Renshaw chaired the meeting. He was known affectionately to friends and clients as BRen and had been the senior partner of Warr & Co. for 20 years, but was now hoping to retire in 4 or 5 years. BRen brought along Edwards Peters, a newly qualified accountant who BRen was fast tracking to partnership.
The contract that Simon had secured had a day rate of £400. This compared very favourably to the £30,000 per annum that Simon’s last employer paid.
BRen started the meeting off.
“Simon, it’s good to meet you. I’ve taken the liberty of having your contract independently reviewed for IR35 compliance. The result has come back as borderline. In the circumstances I recommend that you treat the contract as exempt, but put money aside in case the Inland Revenue prove otherwise”.
“So what does that mean?” asked Simon.
“It means that you use a Limited company and draw a small salary and large dividends. I understand you’re married, so your partner can be a shareholder too, and I recommend you have 1 share each. Your wife can be company secretary and you will be the director receiving a salary of £5,000 per annum and you can each get about £20,000 per annum in dividends. There will be very little tax to pay, so your new family income will be about £45,000 per annum plus your wife’s salary”.
“That sounds great to me” said Simon. “At present I’m left with about £2,000 per month after deductions. We’ll save for a deposit for our first home.”
“And I calculate that the company will accumulate cash at a rate of about £20,000 per annum after expenses and corporation tax. That gives you a buffer in case IR35 comes along to bite you at any stage. Now, I’m going to leave you with Ed who will go over accounting and other admin matters.”
With that, the great man left the office.
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2008, 4 years later
Ian Spectre travelled by train to the North West of England for a meeting with Peter Sanser. Peter had spent the last 20 years devising small scale tax avoidance schemes. Some worked and some didn’t, but he got paid either way. He was intrigued as to why his adversary had suggested an “off the record” meeting.
Spectre explained “We’re having a lot of trouble with IR35. Customers are ignoring it and we haven’t got the resources to prove our case”.
“So where do I come in?” asked Sanser.
“I want you to market an avoidance scheme to contractors“, Spectre said. “I have in mind an EBT loan scheme. Employ the contractors, pay them a small salary, contribute to an EBT and get the EBT to advance a 90% loan”.
“And what about the 10%?” asked Sanser.
“That’s your fee.” replied Spectre.
“Now I’m interested” said Sanser, “but how will I get tax relief on a contribution to an EBT?”.
“You have a UK company and an Isle of Man company,” said Spectre. “The UK company charges the contractors client or agent and the IOM company charges the UK company 99% of the fees it collects. The 1% covers running costs of the UK Company. Then the IOM company pays a small salary to the contractor through PAYE, of course, and puts 90% of the balance into an EBT which then advances that as a loan to the contractor. Of course, you explain to the contractor that although it’s a loan, the EBT will never ask for repayment”.
“Sounds good” said Sanser, “but I’ll need counsel’s opinion”.
“Already sorted” said Spectre “I’ve had a word with Claude Simmonds at City Tax Chambers, he’ll give an opinion for ten grand”.
“So, what’s in it for you?” asked Sanser.
“You market this on the basis that the return is better than using a company and there’s absolutely no IR35 risk. I’ll let it run for a few years and then close it down, with retrospective legislation if I need to, and I’ll collect more tax than I would have done if they complied with IR35. Of course I’ll open enquiries and pile pressure on in the meantime, but I’ll do it at such a pace that you can run this for 6 years or so. And I give you my word that I won’t come after you.”
“I like it” said Sanser, “I just need to come up with a name”
“There are a lot of Antipodeans working in London” said Spectre. “Why not use an Australian sounding name?”.
And so “Brisbane Pay More” came into being.
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Also in 2008
Simon Barton had a second meeting at the offices of Warr & Co. This time Edward Peters, now a partner chaired the meeting and BRen who was retiring at the end of that week, sat in.
“How’s everything going?” Ed asked.
“Really good” said Simon “we’ve built up £100k in the company and 3 years ago we were able to get our first house, with a mortgage of course. We’ve just found out that my wife is expecting, so we’ll soon be a proper family.”
“And how can we help today?” Ed asked.
Simon explained that he had been referred to Brisbane Pay More and had spoken at length to their Bob McAllister. Simon went on to explain how the scheme worked and said he wanted Warr & Co.’s views on whether he should join it.
“This is a tax avoidance scheme” BRen said “Some work, some don’t, but HMRC challenge them all”.
“Am I presently at risk from an attack under IR35?” Simon asked.
“Yes” said Ed.
“And if I do have an attack from HMRC and lose, how much of the £100k reserves I’ve built up will be left?”
“Very little.”
“And if I stop trading, dissolve my company, and realise a capital gain, can HMRC come after me personally?”
“It’s possible” said Ed, “but unlikely.”
“And do you agree that genuine loans are not income?”
“Yes.”
“If I stay as I am, can you guarantee I’ll win if there is an IR35 enquiry?”
“No.”
“And if I join Brisbane Pay More, can you say with certainty that I will one day have to pay tax on the loans?”
“No.”
“So if I join Brisbane Pay More and keep say 30% of the loans on one side, and if HMRC are able to tax the loans, I will be no worse off than I would be if I carried on like I am and was found to be caught by IR35?”
“Probably not.”
“But by quitting while I’m ahead, the £100k reserves I’ve built up in the company are safe right?”
“Yes, probably.”
BRen interrupted, “Please be careful Simon. If something sounds too good to be true it usually is.”
“I take on board what you say BRen” said Simon, “but my wife and I can afford to move to a bigger house if we dissolve the company, and with a little one on the way, that’s a priority. So I’d like to instruct you to prepare final accounts and dissolve the company.”
With that, the meeting ended and the next day Simon telephoned Bob McAllister to give him the good news. Bob reminded him that Brisbane Pay More would do his tax return for free so he would save all the fees he was currently paying to Warr & Co.
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2010
Fast forward two years, and Simon was happy with the way the scheme was working. There was far less admin involved than there was when he had his own company. He had had a couple of rate rises and the money was coming in. Every month he religiously put 30% aside “just in case”. He had chosen not to tell his wife about these arrangements because he knew she would worry.
In December 2010, Simon received an email from Bob McAllister advising that the scheme would have to be tweaked because HMRC had closed the loophole. The email went on to explain that Brisbane Pay More was now ceasing to trade and that Southminster Contracts would take over. The only difference was that Simon would now be self-employed instead of employed, but would receive loans in exactly the same way as he had before. Simon figured the first scheme must have worked because otherwise HMRC would not have needed to close the loophole. He was happy to move to the new scheme.
Another email arrived shortly after in January 2011 advising that HMRC were opening enquiries into 2009 tax returns. The email went on to confirm that the scheme was robust and expressed the view that HMRC were “trying it on” because they didn’t close the loophole earlier. Simon felt a little uneasy and decided to meet up with his best friend after work to seek some reassurance.
Several months passed and more emails flowed. But Simon had heard nothing from HMRC. So he telephoned Bob McAllister.
“You’re in the clear for 2008-09 mate” Bob said “Not that there’s anything to worry about of course, but HMRC had all the information and if they wanted to open an enquiry on you for that year they had to do so by 31 January 2011. Give it another six or seven months and 2009/10 will be closed too”.
Simon felt elated at that news although he thought Bob sounded different. He resolved to meet up that evening with his best friend to pass on the good news.
***************
2014
Simon returned home one day to find his wife in tears. She had opened a letter addressed to Simon from HMRC.
“What’s this all about Simon?” she asked ‘This letter says we owe over £100,000 in tax! Did Warr & Co put you up to this?”
“Don’t worry about that” replied Simon, “I joined this scheme 6 years ago to make sure we didn’t have any problems with IR35, I didn’t tell you because I didn’t want to worry you”. Simon went on to reassure his wife.
“HMRC are bluffing, Warr & Co said I shouldn’t get involved, but Bob McAllister is confident that we won’t have to pay a penny. But I’ve put the money in a separate bank account just in case. Also, there were 2 schemes, HMRC failed to pick me up on the first one, but I’ve got money put aside for that one too.”
But his wife was clearly very upset having read the content of the somewhat threatening letter, and decided to take some time away, opting to take their five year old and go to and stay with her family for a while. Simon then went to see his best friend, who he was sure would help him figure out what to do next.
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2015
In the run up to Christmas 2015, Simon met up with his best friend. “I think I should quit Southminster Contracts and start up a company again. The pressure of all these letters from HMRC is getting to me. It’s affecting my work and I’ve finally had to take a rate cut. The divorce didn’t help. Luckily she agreed to a clean break, she got the house and I got the cash I put aside in case the schemes failed. I’ve used the money I put aside from Brisbane Pay More to put down as a deposit on an apartment. I’m in the clear on that scheme of course. So straight after Christmas I’ll go to see Ed Peters to get set up properly, and I’ll ask him at the same time to settle the open enquiries on the Southminster Contracts scheme. Now, how about another drink?”
For the first time since his marriage broke up, Simon felt confident again.
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2016
Straight after Christmas Simon went to Warr & Co.’s offices and met with Edward Peters. He explained what had happened over the last 7 years or so and what he wanted to do. “You and BRen were right all along” he said.
“Never mind that now” said Ed, “I’ll phone HMRC this afternoon and get this loan thing put to bed as soon as possible”.
“Thanks” said Simon.
“I’m really sorry to hear that you and your wife split up.”
“Thanks Ed, but I’m doing much better now, I’ve even been on a couple of dates. I’m going to focus on my work now, re-build my life, and see what happens.”
The meeting ended, Ed got on the phone to HMRC and Simon went to see his best friend.
***************
Spectre had had enough fun and games with loans and decided he should bring the matters to an end. In the 2016 budget the loan charge was announced. Contractors would be given the opportunity to pay the full amount of tax on any outstanding loans. Anyone who didn’t would have to add the loans to their income in the year to 5th April 2019 and pay tax at their highest marginal rate. Spectre liked the idea of calling unconditional surrender an “opportunity”. He called it the Contractor Loan Settlement Opportunity, or CLSO.
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2018
Throughout 2017 Ed Peters had been sending emails to Simon and leaving messages on his mobile phone urging him to sign up for the CLSO. Simon had been putting him off saying he would “look at it”. In June 2018 Simon finally took the call.
“Simon, its Ed Peters here. Time is running out for signing up to the CLSO.”
“But Ed, they didn’t find me when they looked at Brisbane Pay More.”
“That’s academic” replied Ed, “if you don’t sign up to the CLSO you have to record the loans on your 2019 tax return. Your liability will be a lot higher.”.
“I can’t pay it right now, the money I put aside was used as a deposit. Work is a bit thin on the ground and I just can’t afford it right now.”
“They’ll let you pay by instalments over 5 years if you sign up.” Ed replied.
“You’ve got to be joking Ed, that sounds like another loan solution. I’ll delay my 2019 tax return until the last minute. I’ll be in a better position to pay by then”.
Simon took the next day off work and went to see his best friend. The day after, his contract was terminated.
***************
April 2019
Spectre made a train journey to the North West of England for a meeting with Peter Sanser.
“I have a favour to ask.” Spectre said.
“You’ve made me a very wealthy man Ian” Peter said, “what can I do for you? How about a hundred grand cash or a sports car perhaps? You just name it.”
“No, nothing like that.”
“I’ve got some vintage champagne in the fridge.” Peter said.
“How about a cup of tea?” Spectre said
“No problem, I’ll buzz Bob McAllister”. A young man came in with a pot of tea and two cups. “Thanks Steve” Peter said.
“Down to business” Spectre said, “We missed a number of the customers who signed up to Brisbane Pay More. Could you let me have a list of the names and NI numbers of all of the customers who joined that scheme?”.
“Of course,” said Peter, “I’ll buzz Bob McAllister”.
10 minutes passed and another young man came in with 10 printed A4 pages in a plastic folder. “Thanks John” Peter said. Spectre looked bemused.
“Oh” said Peter, “our staff never use their own names when talking to customers or other third parties. They’re all called Bob McAllister, even the girls, short for Roberta of course.”
“One more thing” Spectre said, “I granted you immunity, and I’m a man of my word, but I think it’s time you retired, tax avoidance is dead”.
With that, the meeting ended. Spectre got the train back and began the process of searching for customers who had slipped through the net.
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June 2019
Simon Barton was at the offices of Warr & Co for a meeting with Edward Peters to talk about his self-assessment return.
“The contract market has been a bit thin this last year or so” said Simon “so I’ve taken a permanent job at Eastpac Bank. I’m on 70 grand a year and there are bonuses. Plus I met a great woman who works in the HR department, so life is looking much brighter”.
“Good for you” said Ed, “Now, about your tax return, we’re going to need to report the Brisbane Pay More Loans”.
“I’ve given that a great deal of thought” Simon said, “I’ve decided to take the chance and let sleeping dogs lie”.
“You’re not going to declare the loans then?” Ed asked.
“No.”
“Then I’m afraid I can’t help you” Ed replied. “I can’t be involved in helping a client evade tax. You’ll have to file your own return”.
With that the meeting ended.
***************
Six months later Edward Peters took a phone call. “They got me!” It was Simon Barton. Simon explained that he filed his return without including the loan charge, and he had just received the brown envelope.
“Can you help me Ed?” Simon asked, “I’ll come clean now. I’ll sell my apartment and pay the tax and any penalty.”.
Ed said he would be pleased to help.
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August 2019
Simon attended the offices of Warr & Co for a meeting with Edward Peters. There was another gentleman in the room who Ed simply introduced as Andrew Curtis.
“Simon, we have a problem” Ed said sombrely. “A year ago the government introduced what they call a Requirement to Correct Penalty. This arises where a source of offshore income has not been declared”.
“But I was working in London” Simon said.
“But your loans were from a trust in the Isle of Man” Ed replied.
“Ok, so what’s the penalty?”
“I’m afraid its 200%.”
“I can’t possibly pay that!”
“I know” said Ed, “that’s why I have brought Andrew along. He’s an insolvency practitioner. I want you to listen to what he has to say”.
Andrew explained that the only option was bankruptcy. He said that the tax debt would simply disappear and he could keep his apartment. The downside was that there would be a charge on the apartment which would be paid when it was sold. Also, Andrew would manage his salary for 12 months so that something could be paid to HMRC, and finally, he wouldn’t be able to use credit cards for 12 months.
Simon agreed and instructed Andrew to make the necessary arrangements.
At last, he would be able to get his life back on track. He thought about telling his best friend, who he hadn’t seen since he got the job at Eastpac, but decided against it. “Perhaps I should get some new friends” he thought.
***************
Spectre was feeling elated. The list he got from Peter Sanser led him to 10 errant customers. He mused “I can do more. Some humiliation is in order”. If this were the 19th century, stocks would be used to publicly humiliate someone in England, perhaps Spectre could re-introduce them. “No” he thought “stocks are local, I want national coverage. How about a television show? I could walk around a stage in front of an invited audience humiliating errant customers”. Spectre was about to pick up the phone to tell the Director General of the BBC about his idea but realised, just in time, that he couldn’t compel the errant customers to appear. Then it came to him “a web page; of course, I’ll call it Name and Shame”.
***************
2020
The past few months had been very good for Simon. He was due to be discharged from bankruptcy in just three months and to coincide with that he was planning a weekend away when he would ‘pop the question’ to the woman from work that he’d been dating. The phone ringing on his desk shook him out of his daydream he picked it up and heard his girlfriend’s voice, “I need to see you in my office” she said.
“Sit down” she said as he walked in. Simon could see that she looked ashen-faced and was immediately concerned. “Is there a problem?” he asked. She turned her laptop around so he could see the screen. “Look at that”.
Simon saw it was an HMRC web page headed “Name and Shame”. His name appeared there. Instinctively he used the mouse pad and clicked on his name. Up came details of how he had deliberately failed to declare £100,000 worth of taxable income and had then filed for bankruptcy.
“Simon Barton is not an uncommon name” she said, “but I’ve checked it out. This one is you.”
“I didn’t want to worry you” he said.
“How could you keep this from me? I could lose my job over this if they think I knew and I was hiding it. Is that why we’re together?! And on a business level, neither Eastpac Bank nor any other bank, for that matter, can ever employ you again. I have to dismiss you with immediate effect today. Do you want security to get anything from your desk before you leave?”
“We can get over this” Simon said.
“No, we can’t. I never want to see you again.
Simon left the bank in a daze and returned to his apartment where his best friend was waiting for him.
“Where did everything go wrong?” he asked. His best friend said nothing.
“She’s totally overreacting, right? I was only trying to protect her”.
Then Simon’s best friend spoke. “You ignored those who were trying to help you time and time again. You betrayed your wife by failing to be completely honest and take account of her feelings. Then you got a second chance too, but you lied to her as well. You wreck the lives of those closest to you. You’re a waste of space, so for once why don’t you do the right thing…”
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Acting on the request of a neighbour, police broke into Simon’s apartment a week later. They found his body face down on the floor in the middle of the living room. His right hand was gripped tightly around the neck of his best friend which lay empty on the floor beside him.
The following year was terrible for Simon’s son and ex-wife. Simon’s apartment and belongings were claimed to repay some of the penalties, and the rest was taken out of their home which was still in Simon’s name. Upon complaining to their local MP, they were told the outcome was ‘fair’.
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Please Seek Help
If you have found yourself in a difficult position, please know that there is help out there. There are options open to every situation and there are professionals who are waiting for your call.
Please make the call, send a text, write an email, talk to friends and family.
Samaritans
Call: 116 123
Email: [email protected]
Visit: Find your local branch
Campaign Against Living Miserably
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About This Blog
Warr & Co have been publicly quiet about the Loan Charge subject until now. We know there are campaigns out there to stop the loan charge, “Save Lives, Stop The Loan Charge”, we understand that this is a serious situation, and we feel there is a serious story to tell here. This story has been written to inform, rather than to entertain, we feel a duty to represent a very real scenario and to speak out against the way that the Loan Charge has been implemented and is being handled by the Government and HMRC.
In some cases, saving a life means saving someone’s family home, preventing them from filing for bankruptcy, saving their livelihood, but it does sometimes mean physically saving someone’s life.
Suicide lines have reported an influx of calls from distressed individuals caught up in the Loan Scheme situation, and it is so important that if you are struggling with this or similar financial struggles that you seek help.
We believe in everyone paying their fair share of tax, we believe that nobody should ever risk using a tax avoidance scheme, and we believe in always being completely honest and transparent when it comes to taxes.
But we do not believe that everyone involved in these schemes really understood the potential consequences. We do not believe that individuals running these schemes were honest or professional in their approach, even though it was ‘legal’ at the time. And we do not believe that the majority of the 50,000 affected individuals have acted with malicious intent to avoid paying tax.
We also do not believe that the Government should be able to create a law and then enforce that law retroactively. Anyone who is not appalled by this idea probably hasn’t considered the potential for the abuse of this power, should it be applied elsewhere.
Additional Information
- The Loan Charge is a retrospective tax charge that can demand tax be paid from the previous 20 years.
- The Loan Charge affects around 50,000 UK contractors.
- Many of the avoidance schemes were legal, though not advisable, at the time. It was seen as a loop hole, and some people chose to take advantage of this. Umbrella companies, professional advisors and employment agencies recommended these loop holes to individuals who likely didn’t have a sound understanding of the taxation system.
- An EBT is an Employee Benefit Trust. It is central in loan based avoidance schemes.
- Many organisations who were based in mainland UK claimed to be based in IOM and used creative names for their schemes.
- Bob McAllister was invented by a medium sized accountancy firm about 20 years ago. Whenever they got cold callers trying to sell things the receptionist would tell them they needed to speak to Bob McAllister who wasn’t in at that time (and never was).
- The Requirement to Correct Penalty came in for offshore tax liabilities that were not declared by 30th September 2018. The penalty is set at 200% of the tax and interest, and whilst mitigation is possible the minimum penalty is 100%.
- The ‘Name and Shame’ list is real. Believe it or not, the Government have published this list online, most recently adding to it in March 2019 https://www.gov.uk/government/publications/publishing-details-of-deliberate-tax-defaulters-pddd
- The Loan Charge Action Group are working to raise awareness of the problems with the Loan Scheme
- For more information on the Requirement To Correct penalties by clicking here.
© 2019 Warr & Co Chartered Accountants. Warr & Co Chartered Accountants is a member of The Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact any one of the partners on 0161 477 6789 or contact us via our website forms. Warr & Co Chartered Accountants are registered to carry our audit work in the UK, our audit registration number is C002961684, for more information please visit www.auditregister.org.uk.