The Background – A Recap

Tax mitigation schemes that purported to reduce income and National Insurance taxes have evolved over the last 30 years to exploit changes in work practices. Such schemes usually involved money (which would have been taxable as income) being paid to a third party, often via an off-shore employee benefit trust, and the money then being loaned to the individual. As a loan, it attracted no National Insurance Contributions (NICs) and no income tax. The loan would be set up in such a way that it was never envisaged that it would be repaid.

Such schemes were used by employers trying to reduce costs and many had little alternative but to accept the situation. Certain categories of individual taxpayers – such as well paid contractors, IT consultants, management consultants and, most notoriously, high profile footballers - were also attracted by the schemes.

HMRC started to challenge these schemes, brought in legislation in 2011 and ran several settlement opportunities. Whilst this reduced the number of schemes, it did not put an end to them, and more complicated and intricate schemes emerged.

In its challenge to these schemes HMRC had some notable successes, the most prominent being the Supreme Court’s decision in the Rangers Football Club case (RFC 2012 Plc v AG for Scotland [2007] UK SC45). The Court unanimously upheld that payments via an EBT (as described above), were income and therefore attracted income tax and NICs. Whilst the full impact of the decision in Rangers is debated, it became abundantly clear that the courts will strike down schemes where, in reality, their purpose is to disguise income and consequently reduce the usual tax that would have otherwise been due.

The 2019 Loan Charge

HMRC have successfully challenged a number of complex schemes and pursued outstanding tax. However, many people didn’t settle, and tax payers continued to enter into new schemes. Faced with this, the 2016 Finance Act introduced the Loan Charge to try to draw a line under the schemes that worked by making loans. Other disguised remuneration schemes use different structures and were not so widespread and so do not fall within the scope of the Loan Charge.

The Loan Charge was unusual. It enabled HMRC to seek tax on all loans from 6 April 1999 to 5 April 2019. The ability to look back 20 years exceeded HMRC’s normal powers to examine historic matters. The Loan Charge also calculated the tax as being payable in a single year, which usually increased the tax burden on the taxpayer and the sums at issue were often considerable raising concerns over affordability.

Faced with increasing clammer from commentators and tax payers alike, the Government instigated a review.

The Loan Charge Review

Sir Amyas Morse, tasked with undertaking the review, reported in December 2019. He made a number of key recommendations:

• The Loan Charge should not apply to loans entered into before the 9 December 2010.
• Certain voluntary settlements made after 2016 should be refunded where the loan predated December 2010.
• The Loan Charge should not apply to loans entered into after 9 December 2010, where tax payers had made reasonable disclosure of their scheme and HMRC had not taken steps to protect that year.
• Tax payers should be entitled to spread their outstanding loan balances.

These recommendations were made because it was accepted that HMRC’s ability to look back over the full 20 year period was not justified on all the facts and affordability was a genuine issue. The Government have accepted the majority of Morse’s recommendations, and some of the draft legislation required was published in January 2020.

The Position of Accountants

The accountant’s role in disguised remuneration schemes is often that of an introducer. Aware that clients would be looking to mitigate and reduce their tax liability and given the common prevalence of many of these schemes, accountants provided introductions into a variety of schemes that disguised remuneration. Those providers then liaised with the client to provide significant information on the workings of the scheme, its merits, the tax position and its risks.

As HMRC’s challenges have progressed, many schemes have failed and the providers have collapsed with those schemes. The last man standing is too often the accountant introducer.

It’s usually clear the accountants themselves were not advising on the details of the schemes. However questions arise as to the appropriate level of due diligence required before the introduction should have been made, especially given the fees received from those introductions. Some accountants inadvertently slipped into endorsing the appropriateness of the scheme for a client, leaving them with a potential exposure when the scheme failed.

Then there is the issue over risk warnings. Cases such as Barker v Baxendale Walker [2017] EWCACiv2056 have confirmed that professionals owe duties to provide proper risk warnings, and that includes not just general health warnings that tax mitigation schemes may be challenged by HMRC, but in certain circumstances, more comprehensive, specific risk warnings including setting out the implications for the individuals if the scheme fails. Whether adequate risk warnings were given is often contentious.

Once a client is in a scheme, the accountant’s role doesn’t end. Questions arise as to whether there has been a failure to advise a client to extract themselves from a scheme, when the general or specific environment ought to have prompted it. Plus there are sometimes allegations of a failure to recommend settlement of the taxes due when the terms were advantageous and before extravagant costs disputing the position with HMRC were incurred.

As the current raft of claims work their way through the system, it is possible some will be impacted by the reversal of parts of the Loan Charge. The recent legislation means that some who are contemplating settlement should be urgently advised to review their position. Ongoing failures in this respect from current accountants and advisors are likely to result in further claims.