Contractors, if your loan was sold or is being recalled, here’s what to do

Unwelcome and worrying news for many people affected by the Loan Charge has been counterbalanced with a massively helpful LITRG paper on the worrisome issue -- the recalling of contractor loans by companies or their legal representatives claiming to own those loans.

While I will not seek to replicate that paper published by the Low Incomes Tax Reform Group (and indeed it should be read here by any affected taxpayer), this is my exclusive assessment for ContractorUK of this unsettling situation for contractors, including what such contract professionals should consider doing if in receipt of a loan recall demand, writes Graham Webber, tax director of WTT Consulting.

Loud tax noises have drowned out this serious problem

Firstly, let’s recognise that it would be surprising if those who used a ‘scheme’ as sold to contractors between the very early 2000s and now, were unaware that HMRC views the arrangements as tax avoidance.

There has been much activity on the tax side of things, with (three) settlement ‘opportunities’ from HMRC; the loan charge itself, a lot of parliamentary debate and cases advancing through tribunals. So the noise has been loud on the taxation front, so much so that it has perhaps drowned out a potentially more serious problem.

Solutions, Rangers and Statuses

In the period prior to December 2010 a common feature of ‘Disguised Remuneration’ schemes was the making of a loan by a third-party to an individual. In the immediate post-DR legislation period, it was less common. Unfortunately, ‘solutions’ emerged from perhaps late 2011 onwards, which permitted loans to feature again. These later schemes often sought to disguise the loan, but it was there.

It is HMRC’s argument that these loans are taxable income, usually employment income. This is based on ‘the Rangers case’ in which HMRC won an argument that the payment becomes liable to tax as employment income at the time when the employee becomes entitled to it. Receipt is not necessary.

The money – later – went to a third party (a trust in that case), and was then made available to the individual via a loan. Thus, the funds have a different tax status dependent upon the stage in the transaction being considered. It starts as employment income, becomes a contribution to a trust/third party, then becomes a loan.

Then and now

Many of the lenders (either of record or who later acquired the loans as a contribution) conducted necessary trust admin work for many years with no fees. While the administration burden is light, some will have been obliged to make returns or perhaps be subject to audit from local financial authorities. Some loans belonged to companies now long-dissolved and as assets, they went to shareholders who often used offshore tax havens to shelter them.

Today in 2021, some of these books of loans have now fallen into the hands of either liquidators as the lender has become insolvent, or they have allegedly been acquired by third parties from the trusts.

Consequently, loans that many contractor-recipients will have forgotten about or were relying upon a phone conversation from years ago that they “would never be collected,” are now being demanded.

Remember, the liquidator of an insolvent company is obliged to tally the debts and seek to recover from the available assets, funds to meet as much of that debt as possible. In most cases, HMRC is the largest declared creditor and therefore is able to direct the actions of the liquidator. This has led to some situations in which HMRC appears to be party to ‘arrangements’ in which if the alleged borrower settles their tax position, the liquidator will no longer pursue the recall of the loan.

A bitter irony for contractors

I’m not an insolvency specialist but those I’ve spoken to say that this arrangement is certainly novel, and often lacks an understanding of the true facts of the situation. Bitterly ironic therefore, that having been enticed to use a scheme which almost certainly will never work as originally constructed, many contractors find themselves victim to debatable actions from HMRC and professional liquidators.

Where the loans have found their way to a new owner, without a liquidation, the situation is arguably worse. The new owners are not constrained by insolvency rules or professional practice, and are instead seeking repayment of loans that they may have acquired for a bargain price.

You must act

Contractors, if you receive contact from anybody claiming to now own a loan you accrued years ago, DO NOT IGNORE IT. I say this not to scaremonger, quite the opposite. It is so that you have an opportunity to put forward your (hopefully extensive) rebuttals.

Be aware, a polite letter asking for repayment or more usually, offering to “settle” the loan for a discounted value, has been proven in recent weeks to swiftly turn into a more pointed demand for repayment -- if nothing is done. Despite this, contractors should keep in mind that a demand does not presume its accuracy. It is simply one side stating its position. Consequently, failing to respond simply gives the side issuing the demand no reason to stop.

Assembling your reply / defence

So, what can be done if you’re a contractor on the receiving end of a loan recall demand from a company, or that company’s firm of solicitors?

Your initial consideration has to be that in many instances, assurances were given by the scheme operator that due to the loan being housed within a trust, you would be protected from an immediate demand for repayment.

These assurances will be a useful starting point to your defence.

Further consider that when assessing the legitimacy of a loan agreement, a judge would explore the facts in line with the supporting documentation. Where it can be shown that neither party to the transaction had any real intent to enter a legally binding agreement, it may be concluded that the agreement is unenforceable or ‘void ab initio’ (void from the beginning).

The burden of proof

Secondly, it is incumbent on the company seeking to enforce the purported debt to prove that they own the debt, that it exists and that you are the correct debtor. This is called the ‘burden of proof.’

Absence of evidence supporting the above shows that the purported creditor cannot discharge the burden of proof, rendering their claim potentially unenforceable.

Contractors should be aware that a statutory demand is a tool favoured by the purported creditors in this case. This is because it can be issued for the tiny price of a stamp after downloading a form from the internet! Carrying with it a threat of bankruptcy, the fear it provokes is often the intended reaction.

Get disputing

Despite this, a statutory demand is not a tool to be used for debt recovery even though it is commonly incorrectly used as such. Instead, its purpose is for enforcing an undisputed debt as a precursor to bankruptcy. The key word here is ‘undisputed.’

Crucially, if the matter is disputed in advance of a statutory demand, one cannot be issued. As a result, we would always suggest that where an initial demand is received, a challenge is duly issued by the contractor-recipient (as I noted previously), albeit being cautious not to offer personal information. That protective measure can ensure a statutory demand is restricted, thereby saving considerable costs of defence further down the line, including an unnecessary appearance at your local bankruptcy court.

Reaching out, the Revenue and (unfortunately) no swift resolution

Also be assured that there are companies (like ours) which have formed groups of individuals who have loans from the same or related sources. These have the advantage of spreading the costs of professional help and providing support while offering wider and more consistent evidential support.

In an ideal world, we would force HMRC to introduce legislation that would prevent collection of loans that they have treated as income. That action is underway from WTT on behalf of a number of client groups. Unfortunately, there will be no swift resolution here.

In the meantime, if you have received a solicitor’s letter or similar notice relating to an alleged loan and do not wish to settle it, reach out to a specialist, all of whom should be able to give you free and clear initial help, if the guidance herein or in the LITRG’s helpful paper isn’t sufficient. This loan recalling action really does represent the sting in the long tail for many a contractor, though knowing how to treat it can relieve the unsettling effects.