The loan charge and what you need to know

For many years, HMRC have been obsessed with the tax gap – that’s the difference between what they think they should collect and what they actually end up collecting. They put down any difference not to their own miscalculations but to people making mistakes on their self assessments, under-reporting of income, and tax avoidance schemes.

One popular way to avoid taxes in the last 20 years or more has been through Employee Benefit Trusts. However, a recent change in legislation means that people who were members of and employed by such schemes have a very nasty surprise coming there way on April 5th – the Loan Charge.

In this article, we look at the Loan Charge, the history behind it, how much it will cost taxpayers, and what to do if you’re affected.

What are employee benefit trusts?

There are many different names for the types of scheme that caused this situation but probably the best known type of scheme is the Employee Benefit Trust scheme. This is the accounting practice which got Rangers Football Club in Glasgow into such trouble earlier this decade eventually leading to it going into administration.

This is how Employee Benefit Trusts work. They pay the members of the trust in a tax-free loan instead of an income. This tax-free loan is never paid back and it is never intended for repayment by the beneficiary. Loans are received by members instead of their salary. The member of a scheme is an employee and the employer pays their employee through a loan from a third party – the Employee Benefit Trust.

For the longest time, HMRC saw nothing wrong with this in the sense that they did not pursue members of the trusts, organisers of the trusts, or promoters of the trusts. They did issue warnings expressing the opinion that the schemes were run solely for the purpose of avoiding tax but they never took any action against them. They were, de facto, “legal”.

That all changed when the Finance (No 2) Act of 2017 was passed. This Act gave HMRC the right to consider the loans received by the members of these schemes as income. Worse than that for the beneficiaries, HMRC were given the authority to charge tax on this newly-defined “income” going right back until the year 1999/2000.

HMRC acknowledge that many of the members of the scheme will have been mislead by the promoters of the scheme, particularly in the light of the guidance published prior to the passing of the Act that they believed these schemes were designed and run so that individuals involved would not pay tax. Many others, particularly contactors and freelancers working for agencies or specific clients, may have been instructed to enter the scheme under threat of not receiving any more work.

However, to HMRC, this does not matter. People who were mislead into or forced to join a scheme will be treated in exactly the same way as someone who joined a scheme with the specific intention of avoiding paying tax.

What is the 2019 loan charge?

The Loan Charge is the tax that will be due to be paid on the money originally paid as a loan but now reclassified as income. The tax is likely to be substantial with many members having to pay tax on up to 20 years’ worth of professional activity. For some members, the charge could be the equivalent of 60% of the money received originally as a loan as it includes both forms of National Insurance and income tax.

HMRC are also entitled to send you any tax demand based on these types of loan made since 1999/2000 including umbrella company loans.

How much will members have to pay? The actual amount will be calculated by looking at the total of all the loans which have not been repaid between April 6th 1999 and April 5th 2019. This amount will then be subject to income tax and National Insurance payments (employees’ and employers’) at the rate in each applicable year. In the first instance, your employer (for example, Rangers Football Club) must report this amount and then account for it via the Real Time Information system or they will face a large fine and be liable to other sanctions if they don’t.

If HMRC can not collect the payment from the employer then HMRC will come to you directly.

What can you do if you’re affected?

If HMRC come to you for the cash because it can’t recover the money from the employer, you can either pay the charge, pay the outstanding loans back to the Employee Benefit Trust, or contact HMRC to organise and agree a voluntary settlement of tax and NI owed. If you contact HMRC, you should do this straight away.

Towards the end of 2018, HMRC announced that any taxpayer caught out by the charge earning less than £50,000 a year who was no longer involved in any similar type of scheme would automatically get 5 years to pay them back in instalments. Longer periods may be considered depending on your individual financial circumstances.

What if you got bad advice?

There is a theoretical option available to you where you could pursue them for negligence (if they are still trading) but any such action would be, we regret to say, highly expensive and very speculative.

How to deal with HMRC

There’s now less than three months to get this sorted. HRMC are insistent about getting as much money in as they can through this scheme so it genuinely is better to get in touch with them rather than put it off any longer. The best point of first contact with them is by emailing

If you can’t face the idea of getting in touch with them, please appoint an accountant straight away as your agent to act on your behalf. Although an accountant may not be able to reduce the amount of tax you have to pay for the Loan Charge, they will be there to guide you through the process and help you understand what options you have open to you.

We’re always here to help here at the Financial Management Centre. Please call us today on 0800 470 4820 or email

Stuart Masters - Director at TFMC
Stuart Masters

Stuart has spent almost 20 years in accounting with a significant amount of time focused on Outsourcing and the provision of bookkeeping and financial management information for businesses.

Specialties: Bookkeeping, Management Accounts, Accounts Outsourcing, Business Development, Business Planning, Year End Accounts.