Why Loan Charge 2019 risks ruining the UK economy

It’s not just unjust, but it’s also a bad economical choice. That’s my take on HMRC’s hunting of the self-employed, writes Oliver Hibbs-Brockway, chief executive of freelance marketplace Nodal.

This hunting will actually detract a thriving contractor economy and, in turn, increase the UK’s unemployment rate, even though it’s currently at its lowest since the financial crisis. 

According to the Loan Charge Action Group, an average of £120,000 has been demanded from each self-employed worker who has been paid via a ‘disguised remuneration’ scheme. The scheme reduced Income Tax and National Insurance contributions by paying income in the form of loans.

Despite the fact that HMRC was fully aware that this method of payment was being used, the retrospective Loan Charge was announced by George Osbourne in Budget 2016 and introduced in the Finance Act 2017. This allows Revenue to clawback £3.2 billion of retrospective taxes – all the way back to 1999, before the repayment deadline of January 31st 2020.

The Loan Charge affects more than 50,000 self-employed workers, many of whom who were advised by tax ‘experts’ to accept payment via the scheme. Some even have written guarantees from the taxman that the scheme was legal and none have been proven otherwise in court!

Nevertheless, HMRC is now tracing funds back to 1999; at odds with the fact that finance records are required to be kept for only seven years. And if the scheme users missed the April 2019 settlement deadline, they are faced with a much higher rate of tax of up to 45%. This is because the sum of the loans is treated as income on April 5 2019, or profits in the year 2018/19. 

More than half of the scheme users work in the business services sector, such as management and IT consultants. The tax demands also affect teachers, nurses and small business owners whose tax charges are likely to be more than their yearly wage. This has caused extreme anxiety, distrust, bankruptcy and even suicides.

The backdrop to all this is that there are now nearly 5 million self-employed workers in the UK -- the highest level ever. The ONS estimates the current rate of unemployment at 3.8%, which correlates with the decline of the conventional job and an increase in contract workers. Additionally, the ONS figures show that job growth was driven by a rise in self-employment, while the number of full-time employees has dropped by 78,000 in the three months running up to May 2019. Add in to this mix research from IPSE showing that the number of highly skilled contractors rose by 47% between 2008 and 2018 (driven by a 63% rise in highly skilled female contractors in this period), and you begin to see what’s at stake. Oh, and one in eight of the solo self-employed workforce – those in the crosshairs of the loan charge, are actually working mothers. 

This workforce is bringing a diverse set of high level skills and allows businesses to benefit from the knowledge and experience they have amassed from working at other companies. In fact, almost half of the UK’s solo self-employed are in the three occupational categories; IPSE says, notably managers, directors and professional / technical category workers. 

Collectively, they provide a monumental £275 billion to the economy – an input which risks being bludgeoned by this loan charge. It is likely that the charge will detract and deter these workers and, due to the increased demand for highly skilled contractors rather than full time employees, an increase in the unemployment rate is all but assured.

As an entrepreneur, I know that tax is a complex matter and an administrative burden for contractors, so they generally look to ‘tax experts’ for assistance -- who we should be able to trust. But I fear the Loan Charge will encourage highly skilled, self-employed workers to forego the freedom and flexibility of working solo in favour of employment security to safeguard themselves from HMRC. How can they, or their advisers, trust that the tax rules will not change again, and result in huge costs that could be financially crippling?

So it is both unfair and a bad economical choice to subject contractual workers to these exorbitant fees, due to no fault of their own. Chasing each of them for thousands of pounds will have more damaging effects long term on the exchequer, the government, its image. In short, it will totally discourage a thriving independent workforce, and at time when our country will need all the economic boosters it can get.

It’ s little wonder that there is strong opposition to the Loan Charge, with a 150-strong All-Party Parliamentary Group setup to highlight concerns and call for suspension of the policy. On top of these upstanding MPs, there are also campaigners protesting outside of the House of Commons. 

And the opposition to the charge seems to come from the top. In June, prior to taking his place in No 10, Boris Johnson said: “The real culprits in this matter, if I may say so, are not so much the individuals themselves who have decided to use the loan charge as a way of minimising their tax exposure. It's the people who advised them that that was a sensible thing to do.” 

The prime minister added: “It seems superficially unjust to me that they should then be retrospectively pursued for what they were told was an entirely legal option. It needs a proper independent review.”

So Boris Johnson pledged to delay the Loan Charge. However nothing seems to have been done and HMRC is still pursuing with its tax hunt!

Does the Revenue not realise that 64% of firms rely on contractors and engage with them to deploy hard-to-find expertise (according to consultancy.uk)? Or maybe it just doesn’t care. From dealing with many independent workers on our platform, it is clear that this Loan Charge should be abolished if the government wants to avoid destroying people’s livelihoods and valuable way of working. 

To Mr Johnson I say this: the UK’s self-employed workforce plays a vital role in the economy and are driving innovation with their knowledge and ability to be flexible – you shackle it with the loan charge at our country’s peril.

Indeed, such workers now account for 14% of the entire UK workforce. If you then consider all the facts regarding the decrease in unemployment rate and growth in the self-employed sector, it feels like HMRC is targeting the very people that have contributed – and are contributing -- significantly to our economy.

It should go without saying that we should be helping our self-employed workforce to develop their skills and win more business, not limiting their reach. It is a bad economic decision to penalise people for accepting payment through a perfectly legal scheme for nearly 20 years. This retrospective legislation surely undermines the very rule of law that our country is championed for, often to the envy of the world. It’s time Mr Johnson and his government acted to ensure that such an enviable position, and indeed his authority, is not undermined.