[2025] UKUT 00278 (TCC)

The origins of the Loan Charge and the subsequent repayment scheme in the form of the DRRS have been described in various previous judgments, including R (Clamp) v HMRC [2021] EWHC 2360 (Admin), [2022] 1 WLR 1067. The following is a brief summary.

Prior to 2011, there was widespread use of arrangements under which employees received part or most of their remuneration in the form of loans or quasi-loans provided by third parties. The typical arrangement was that the loans would be made by trustees of employee benefit trusts, often under arrangements devised by third-party tax avoidance scheme promoters,with the source of funds being the employer. In practice there would be no expectation of repayment, such that the loans were simply part of the employees’ remuneration. The intention of those arrangements was that the loans would escape liability for income tax and NICs.

In an attempt to address these arrangements, Part 7A Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) was enacted with effect from December 2010. That imposed income tax and Class 1 NIC charges on arrangements between an employer, employee and a third party to provide rewards in connection with the employment, where the third party provided a “relevant step” for the benefit of the employee, a relevant step being defined to include a loan to the employee.

That legislation did not, however, prevent the continued use of loan schemes by employers and employees. Schedule 11 of Finance (No. 2) Act 2017 therefore introduced what was referred to as the Loan Charge, which was designed to shut down the use of loan schemes. As originally enacted, the legislation provided that where a person had made a loan or quasi-loan on or after 6 April 1999, and an amount of the loan was outstanding on 5 April 2019, that person was treated as having taken a “relevant step” for the purposes of Part 7A ITEPA 2003.

Loans and quasi-loans were defined for these purposes in §2(1)–(3) of Schedule 11 as follows:

“(1)

In this Part of this Schedule ‘loan’ includes –

(a)

any form of credit;

(b)

a payment that is purported to be made by way of a loan.

(2)

For the purposes of paragraph 1, P makes a ‘quasi-loan’ to a relevant person if (and when) P acquires a right (the ‘acquired debt’) –

(a)

which is a right to a payment or a transfer of assets, and

(b)

in respect of which the condition in sub-paragraph (3) is met.

(3)

The condition is met in relation to a right if there is a connection (direct or indirect) between the acquisition of the right and –

(a)

a payment made, by way of a loan or otherwise, to the relevant person, or

(b)

a transfer of assets to the relevant person.”

The consequence of the Loan Charge was that the outstanding amount of the loan or quasi-loan would be treated as employment income, and therefore subject to income tax and Class 1 NICs in the 2018/19 tax year. Importantly, that was the case not only if the loan or quasi-loan was made in a tax year for which HMRC had opened an investigation into the tax return of the relevant taxpayer, but also if it was made in a tax year for which no investigation had been opened. The effect of the Loan Charge was therefore to override the time limits within which HMRC was otherwise required to open investigations into tax returns, such that a taxpayer might find themselves taxed on a loan or quasi-loan made up to 20 years earlier, in respect of which HMRC had long since lost the ability to open an investigation to recover additional tax which might have been due.

To avoid the impact of the Loan Charge, many employees and employers (including the Fluid claimants and Airedale) settled disputes with HMRC regarding the tax treatment of past loan and quasi-loan transactions.

Meanwhile, in response to concerns about the scope of the Loan Charge, the government commissioned Sir Amyas Morse to carry out an independent review of the charge. His report Independent Loan Charge Review: report on the policy and its implementation (the Morse Report) was published in December 2019. It concluded that certain elements of the Loan Charge were not justifiable. In particular, the Morse Report concluded that:

The Morse Report provided the following definitions of Protected and Unprotected Years and Voluntary Restitution:

“Protected Year A year where HMRC has protected its position by opening an Enquiry within set time limits, has a valid Discovery Assessment in place or is still in time to do so. HMRC’s position is that amounts from these years would be collected through its compliance and litigation activity, without the Loan Charge.

Unprotected Year A return period where HMRC has not opened a valid Enquiry within time limits and does not have a valid Discovery Assessment in place. Unless extended time limits apply HMRC would be out of time to collect amounts they consider due as a result of loan schemes, absent the Loan Charge. Taxpayers were required to pay Voluntary Restitution for these periods under the November 2017 settlement terms to ensure that they are not subject to the Loan Charge.

Voluntary Restitution Paid, but not technically required, for Unprotected Years as part of the November 2017 settlement terms. Paying Voluntary Restitution for a year will prevent a future charge arising, specifically the Loan Charge. … Once agreed with HMRC in the form of a settlement contract, it becomes legally enforceable. Failure to pay Voluntary Restitution will result in the Loan Charge arising in respect of Unprotected Years.”

The government accepted these recommendations in the Independent Loan Charge Review: Government response to the Review (December 2019). In particular, in relation to the recommendation for a refund of the Voluntary Restitution elements of settlements for Unprotected Years, the response stated at §§2.18–20 that:

“The Government accepts this recommendation and recognises that those who have already settled their tax liability have complied with their tax obligations under settlement terms designed on the basis of the Loan Charge applying to all years. These taxpayers should benefit from the decision not to apply the Loan Charge to unprotected years.

Therefore, HMRC will repay Voluntary Restitution that has been paid by individuals and employers since the Loan Charge was announced in March 2016, for years that would be no longer subject to the Loan Charge because the year was unprotected.

HMRC will set out guidance in due course for taxpayers on how HMRC will implement this recommendation.”

That position was reflected in the Finance Act 2020 ss. 20–21, which required HMRC to establish a scheme for repayment of settlement sums as follows (emphasis added):

“20(1) The Commissioners for Her Majesty’s Revenue and Customs (‘the Commissioners’) must establish a scheme under which they may on an application made to them before 1 October 2021–

(a)

repay the whole or part of a qualifying amount paid or treated as paid to them under a qualifying agreement, or

(b)

waive the payment of the whole or part of a qualifying amount due to be paid to them under a qualifying agreement.

(2)

An agreement is a qualifying agreement if –

(a)

it is an agreement with the Commissioners,

(b)

it is made on or after 16 March 2016 and before 11 March 2020, and

(c)

it imposes an obligation on any party to the agreement to pay an amount of income tax that is referable (directly or indirectly) to a qualifying loan or quasi-loan.

(3)

An amount paid, treated as paid or due to be paid under a qualifying agreement is a qualifying amount if –

(a)

the amount is referable (directly or indirectly) to a qualifying loan or quasi-loan, and

(b)

the amount is one that an officer of Revenue and Customs had no power to recover at the time the agreement was made.

(4)

But an amount that is referable (directly or indirectly) to a qualifying loan or quasi-loan made on or after 9 December 2010 is not a qualifying amount by reason of subsection (3) unless at a time when an officer of Revenue and Customs had power to recover the amount a tax return, or two or more tax returns of the same type taken together, contained a reasonable disclosure of the loan or quasi-loan.

(5)

For the purposes of subsection (4), a tax return, or two or more tax returns taken together, contained a reasonable disclosure of the loan or quasi-loan if the return or returns taken together –

(a)

identified the qualifying loan or quasi-loan,

(b)

identified the person to whom the qualifying loan or quasi-loan was made,

(c)

identified any arrangements in pursuance of which, or in connection with which, the qualifying loan or quasi-loan was made, and

(d)

provided such other information as was sufficient for it to be apparent that a reasonable case could have been made that the amount concerned was payable to the Commissioners.

(6)

An amount paid, treated as paid or due to be paid under a qualifying agreement is also a qualifying amount if it is interest on another qualifying amount paid, treated as paid or due to be paid under that agreement.

(7)

A loan or quasi-loan is a qualifying loan or quasi-loan if it is made on or after 6 April 1999 and before 6 April 2016.

(8)

In this section –

‘loan’ and ‘quasi-loan’ have the meaning they have in Part 1 of Schedule 11 to [the Finance (No. 2) Act 2017] and Schedule 12 to that Act (see paragraph 2 of each of those Schedules), and

‘tax return’ means –

(a)

a return made under section 8 of TMA 1970 and any accompanying accounts, statements or documents, or

(b)

a return made under paragraph 3 of Schedule 18 to FA 1998,

and a tax return is of the same type as another if both fall within the same paragraph of this definition.

…

21(1) The scheme may make provision –

(a)

in relation to all qualifying agreements or specified descriptions of qualifying agreements only, and

(b)

in relation to all qualifying amounts or specified descriptions of qualifying amounts only.

…

(3)

The scheme may make provision about the making of applications under the scheme, including—

(a)

provision as to who is or is not eligible to apply,

(b)

provision as to the conditions that must be met in order to apply,

(c)

provision as to the form, manner and content of an application, and

(d)

provision as to information or evidence to be provided in support of an application.

(4)

The scheme may make provision about the determination of applications under the scheme, including-

(a)

provision in accordance with which the Commissioners must determine whether to exercise their discretion to repay or waive the payment of a qualifying amount, and

(b)

provision in accordance with which the Commissioners must determine how much of any qualifying amount to repay or waive.”

It will be seen from these provisions that the distinction drawn in the Morse Report between Protected Years and Unprotected Years was implemented in the Finance Act 2020 by reference to the question of whether at the relevant time HMRC had a “power to recover” the tax that was the subject of the settlement: s. 20(3). “No power to recover” the tax was therefore a threshold condition for the tax amount to be treated as a qualifying amount that could be repaid. Consistent with that, as set out below, the “no power to recover” condition was one of the threshold conditions for recovery under the DRRS. The other main condition specified by s. 20 was the requirement for “reasonable disclosure” to be made of loans made on or after 9 December 2010: s. 20(4) and (5).