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Loan cost contractors face double whammy of life-changing reimbursement calls for as previous loans recalled

IT contractors, already going through life-changing tax payments because of the federal government’s controversial mortgage cost coverage, at the moment are going through a double hit of fee calls for regarding their previous involvement in mortgage remuneration schemes.

Two distinctly separate organisations, buying and selling as FS Capital and Felicitas Solutions, have written to contractors in current months to demand the reimbursement of loans beforehand paid out to them for work they carried out during the last decade or so.

These loans have been sometimes paid to contractors by way of schemes arrange by third-party, offshore worker advantages trusts (EBT), rather than a standard wage, and positioned as technique of legally minimising contributors’ employment tax liabilities.

At the identical time, the recipients of those letters are going through separate calls for from HM Revenue & Customs (HMRC) to repay the employment taxes it claims they averted by partaking with these trusts between 9 December 2010 and 6 April 2019.

The HMRC describes its motion, often called the mortgage cost coverage, as a clampdown on “disguised remuneration”. It has seen 1000’s of IT contractors saddled with six-figure back-dated tax payments because it was launched in November 2017.   

Although loans aren’t normally thought of a type of taxable revenue, those paid out by these trusts needs to be, says HMRC, as a result of they have been by no means supposed to be repaid.

However, a whole lot, presumably 1000’s, of contractors throughout the scope of the mortgage cost coverage at the moment are being chased by FS Capital and Felicitas Solutions to repay the unique loans, plus curiosity – and their mortgage cost liabilities nonetheless stand.

HMRC confirmed this in an announcement to Computer Weekly, by which it defined that the mortgage cost is payable on any disguised remuneration mortgage balances that remained excellent as of 5 April 2019.

“Any repayment of disguised remuneration loan balances after 5 April 2019 will not remove the liability to pay the loan charge,” stated an HMRC spokesperson within the assertion. “Our message to anyone who is concerned about tax matters, or worried that they may not be able to pay tax due, is to come and talk to HMRC.”

The loans versus revenue argument

The motive for that’s pretty simple, based on Andy Wood, founder and director of tax advisory agency ETC Tax. “The effect of the loan charge is that the loans are taxed as income,” he stated. “However, for legal purposes, they are – all things being equal – still loans.”

As such, if the proprietor of that debt (or mortgage) decides they need that cash again, they’re nicely inside their rights to request reimbursement. However, that is an end result that few – if any – mortgage scheme contributors have ever budgeted for.

According to an IT contractor who took half in schemes related to a number of totally different trusts between 2010 and 2017, there was at all times an understanding between the trusts and the beneficiaries (the contributors) that the loans they obtained would by no means be recalled.

“The trusts were set up solely in the interests of the beneficiaries, so as much as the loans are completely genuine, the trust could not recall them because it would not be in the best interests of the beneficiaries. Everyone understood this,” the contractor advised Computer Weekly, on situation of anonymity.

Now the loans have been offered on to 3rd events (FS Capital and Felicitas) that don’t appear to be certain by the identical guidelines beneath which the unique trusts operated. And so the protections beforehand afforded to contributors now appear to have disappeared, stated the contractor.

“So, if the loan is repaid to FS Capital or Felicitas, the loan charge and any other outstanding accelerated payment notices [from HMRC] would still be payable, which means everyone involved is facing a double whammy of payment demands,” the contractor added.

Assessing the affect on already-stressed contractors

This state of affairs is more likely to exacerbate the stress and anguish that many contractors affected by the mortgage cost are already experiencing, stated Steve Packham, spokesperson for the Loan Charge Action Group (LCAG), which gives help and recommendation to people caught by the coverage.

“These individuals now face having to pay the loan back and still having to pay vast amounts of unproven tax on these loans,” Packham advised Computer Weekly.

“This is absurd, but in addition grossly unfair and harmful. Bankruptcy can be inevitable and, with seven recognized suicides of individuals going through the mortgage cost, this case creates a critical threat of additional tragedies.

“The fact that they are being recalled clearly shows that the loans are loans and that HMRC is wrong to be treating them as income. This must be addressed so that people are not wrongly pursued for tax which they do not owe.”

Research compiled by the Loan Charge All Party Parliamentary Group (APPG) in late 2019, as a part of its inquiry into the coverage’s impacts, revealed that 39% of these throughout the coverage’s scope have skilled suicidal ideas, and 68% have suffered melancholy.

In the sunshine of this, the truth that these loans at the moment are being recalled is “clearly unfair and wrong”, stated Sir Mike Penning, one of many Loan Charge APPG’s three co-chairs, and is one thing the federal government should act on urgently.

“It is appalling that people are facing a huge loan charge bill and are facing recall of these loans at the same time, meaning they are facing being hit twice for vast unpayable demands,” he stated. “Either it is a loan or is it income. It can’t be treated as both.”  

For this motive, Penning stated the APPG will name on the federal government to handle the problem within the forthcoming Finance Bill.

At the time of writing, it’s unclear when the ultimate model of the Finance Bill 2020 will floor, provided that the draft model of the laws dropped in March 2020.

What’s in a declare?

While contractors wait and see if the APPG succeeds in getting the matter addressed by the federal government, a number of tax advisory companies are at the moment attempting to succeed in some type of decision with FS Capital and Felicitas Solutions.   

Wood’s agency, ETC Tax, is amongst these and is helping a whole lot of contractors to contest the calls for as a result of, in his view, the letters provide scant proof that both of those companies have acquired the loans they’re in search of to recall.

For this motive, Wood claims that the letters are in breach of “pre-action protocol”, which implies they don’t adhere to the sequence of steps that an organisation or particular person should take to carry a declare or resolve a dispute in courtroom.

“My advice to contractors is to dispute the letters because it’s got more holes in it than a piece of Swiss cheese,” he stated.

This is maybe why, when the FS Capital letters first emerged in November 2019, quite a lot of contractors contacted Computer Weekly for assist to determine whether or not or not the letters have been real, or a part of a rip-off designed to prey on folks already weighed down with sizeable mortgage charge-related payments.

And it isn’t laborious to see why. A fast seek for FS Capital at Companies House confirms that the enterprise has solely been in operation since mid-May 2019. Also, the loans it was making an attempt to recall have been thought by many contractors to be beneath the management of a Switzerland-based belief often called Pinotage.

And but a letter arrives from an entity, beforehand unbeknown to the recipient, stating that their mortgage is “now due and payable” and that curiosity on it should begin to accrue seven days from the date of the letter.

These letters have been interpreted by some recipients as a requirement to pay what they owed in full immediately, however FS Capital director Simon Emblin denied that in an announcement to Computer Weekly.

Instead, these preliminary letters have been supposed to make contractors conscious of the change in possession of their loans and open a dialogue with them about how they supposed to pay, he stated.

“FS Capital, as the new acquirer of the debt, was required to notify all the contractors that it had acquired the debt and to inform them that the loans were now payable on demand,” stated Emblin.

“Having done that, it [FS Capital] then wrote to all the debtors to offer them a number of options to settle at a much reduced cost, while still preserving its right to enforce the full debt should negotiations ultimately fail.”

Computer Weekly understands that one such diminished reimbursement plan noticed contractors provided the possibility to clear their entire debt in alternate for parting with 6% of the whole mortgage quantity they owed, plus a £950 administration charge.

These negotiations are recognized to contain not less than two tax advisory companies, WTT Consulting and Peak Performance, which, individually, are appearing on behalf of two tranches of contractors to get FS Capital to contemplate revising down the 6% determine additional, based on sources with data of those negotiations.

“FS Capital looked to engage with organisations that held themselves out as representing large numbers of the debtors, namely Peak Performance and WTT Consulting,” stated Emblin in his assertion.

“FS Capital recognised that such parties could potentially bring large numbers to the negotiating table and therefore it was prepared to settle for amounts lower than set out in the ‘without prejudice’ offer letter.”

He added: “In the interests of allowing these discussions to take place, FS Capital unilaterally offered a moratorium period on any debt collection. To date, FS Capital has not proceeded with any debt enforcement action against any debtor.”

A stall in negotiations

An unspecified variety of contractors have reached particular person settlements with FS Capital, stated Emblin. “However, the discussions with both Peak Performance and WTT Consulting have stalled,” he added.

Representatives from each Peak Performance and WTT Consulting confirmed to Computer Weekly that negotiations have certainly slowed in current weeks, however the firms declare the explanations for that lie with FS Capital.

In an announcement to Computer Weekly, Graham Webber, director of tax at WTT Consulting, stated his firm has been in “fairly frequent touch” with FS Capital over the previous couple of months to determine the “strength of their claims” and the seemingly penalties of “meeting or resisting” them.

“We have been investigating these and seeking a path for our clients that achieves the best outcome for them [the contractors],” stated Webber.

“To this end, we have made a series of proposals to FS Capital which, for various reasons, have so far failed to find approval. We are continuing the discussions and have not ruled out reaching an accord.”

A decision to the state of affairs grew to become additional difficult in February 2020, when Emblin was arrested by HMRC, which prompted Peak Performance’s representatives to withdraw from negotiating straight with him.

Peak Performance’s involvement in these discussions is being carried out by a associated organisation known as the Loan Assignment Group Association, which is in search of to resolve the FS Capital matter on behalf of 700 contractors.

In an announcement to Computer Weekly, a consultant for the affiliation confirmed that the discussions with FS Capital have stalled, and cited Emblin’s arrest as a causal issue.

“For legal reasons, all contact with FS Capital must now be conducted through the association lawyers,” stated a spokesperson for the affiliation in an announcement to Computer Weekly.

“We perceive that Simon Emblin was arrested and questioned by HMRC in February 2020 and stays a suspect in an ongoing HMRC investigation, which can relate partly to the loans he’s attempting to implement.

“It is therefore not possible to continue discussions with him personally. Our solicitors have offered to speak to FS Capital’s solicitors, but Simon Emblin has rejected this out of hand. So yes, Simon Emblin is correct when he says discussions have stalled. The association solicitors are in written communication with FS Capital.”

Emblin confirmed his arrest however strenuously denied any wrongdoing in an announcement to Computer Weekly, and stated he had been launched with out cost by HMRC and was helping the company with its enquiries, that are unrelated to his work with FS Capital.

“FS Capital continues to carry on its lawful business,” stated Emblin in a follow-up assertion. “The [association] may not be serving his members’ best interests by unilaterally withdrawing from negotiations, as the aim of such discussions was to avoid the need for FS Capital to commence formal debt enforcement action.”

Currently, FS Capital is amidst a moratorium on taking debt enforcement motion towards the contractors who’re but to succeed in a settlement with it. This interval was attributable to finish on 31 March 2020, however will likely be prolonged till 30 April 2021, the corporate confirmed in an e mail to contractors on 27 March 2020. This is on the proviso that “debtors” half with £950 first.

“The moratorium on taking debt enforcement action is due to end on 31 March 2020,” it stated within the e mail, seen by Computer Weekly. “Although discussions proceed with each Peak Performance and WTT Consulting, little or no progress has been made, and the present coronavirus state of affairs has solely made this worse.

“FS Capital has therefore concluded that, in the current uncertain environment, it is prepared to offer an extended moratorium that will last until 30 April 2021. This offer is made on the basis that you confirm that you are prepared to enter into an agreement with FS Capital by 30 April 2020.”

By doing so, FS Capital pledged within the e mail that it’s going to take “no enforcement action whatsoever” with regard to contractors’ money owed earlier than 1 May 2021.

“FS Capital agrees not to assign or otherwise transfer ownership of the debt to any other party prior to 1 May 2021,” it stated.

“In return for which, every debtor will enter into such an settlement and pays FS Capital £950 by 31 May 2020; such quantity to depend as a component fee in direction of any closing settlement to be reached with FS Capital.

“No interest will accrue on the outstanding debt from the date any such agreement is entered into until 1 May 2021 at the earliest,” the e-mail added.  

According to Emblin, the truth that FS Capital has held off pursing any debt enforcement motion towards contractors thus far is “indicative of the company’s desire to reach a settlement by agreement”.

He added: “Ultimately, for those parties that do not want to engage, FS Capital will have no alternative but to enter into formal proceedings and seek full recovery of the debt plus outstanding interest. This is not FS Capital’s preferred option but, failing all else, it is an option that will be exercised.”

A story of two mortgage companies

Felicitas Solutions, in the meantime, relies within the Isle of Man. The firm has been up and operating since 6 January 2017, and has ties to a different couple of companies with comparable names which might be registered with the Malta Financial Services Authority.

Some of Felicitas’ letters are being despatched out straight from the corporate to contractors, whereas others are being distributed by a authorized agency primarily based in Knutsford, Cheshire, known as Gladstones Solicitors.

At the time of writing, each Felicitas and Gladstones have failed to answer any of Computer Weekly’s repeated requests for remark since its letters began showing in contractors’ mailboxes in February 2020.

Similar to the FS Capital letters, the primary correspondence tells recipients that their loans have modified palms and been handed on to Felicitas, earlier than setting out how a lot they nonetheless owe and particulars of any repayments which were made thus far. Subsequent letters, seen by Computer Weekly, then progress to a dialogue of curiosity repayments.

ETC Tax’s Wood helps quite a lot of contractors dispute these letters, which concern loans they obtained from a number of trusts from late 2012 onwards.

Wood has drafted a letter that recipients can ship again in response, or they’ll get his firm to ship it on their behalf freed from cost, he stated.

“We’re not charging anything for it, and it basically says we want this information that you should have provided as part of the pre-action protocol, and the documents you would rely on in court [to make a claim],” he stated.

At the time of writing, Computer Weekly is conscious that quite a lot of people who’ve gone down this route have obtained responses from both Gladstones or Felicitas directing them to a URL the place they’ll reportedly entry the data they want.

The URL results in a shopper login web page on the Felicitas web site, and guests to it must contact Felicitas to create an account to allow them to entry the documentation regarding their loans.

“Clearly, this is not good enough and most people are very wary of clicking on these links as they think it is a scam,” stated Wood. “We are requesting paper documents or asking that they email them to us.”

Also, at any time when contractors have requested ETC Tax or one other tax agency to take care of Felicitas and Gladstones on their behalf, these requests have been ignored, with letters persevering with to be despatched on to the contractors themselves.

At the time of writing, it stays to be seen what the subsequent steps will likely be within the Felicitas case, however Wood has his personal concepts about how the state of affairs might pan out.

“My take on it is that this is essentially an exercise where they send these letters out to 1,000 people, and even if just five of them are vulnerable enough to pay up, that will give [these companies] a return on investment that will make it worthwhile,” he stated.

History repeating itself

On that time, it’s price noting that neither FS Capital nor Felicitas Solutions are the primary firms to jot down to contractors already in scope of the mortgage cost, urging them to contemplate paying again all or a part of the cash they obtained in loans.

Another entity – buying and selling as each Trust Help Line and Helpline Services – emerged in mid-2018, and equally claimed to be appearing on the behalf of varied EBTs that provided mortgage remuneration schemes to contractors between 2008 and 2016.

This organisation started emailing contractors, providing them entry to a web-based portal that claimed to host details about the excellent worth of any loans that they had obtained, earlier than requesting details about how they supposed to answer the looming mortgage cost coverage.

The recipients of those emails advised Computer Weekly the messages have been unsolicited, leaving many to imagine that their previous involvement with these trusts had one way or the other led to their particulars being handed on to the perpetrators of phishing scams.

Particularly as the e-mail urged recipients to add copies of paperwork pertaining to their loans, together with a passport picture of themselves and particulars of the place they dwell, which is info many contractors may fairly assume that anybody with prior data of those preparations would have.

A duplicate of the e-mail, seen by Computer Weekly, additionally makes reference to a sequence of economic penalties it claims contractors are leaving themselves open to in the event that they fail to behave on Trust Help Line’s missive in a well timed approach.

“Even if you’ve already settled your income tax liabilities with HMRC, your loans are still outstanding,” it states. “HMRC say those with outstanding loans might incur 10-year periodic inheritance tax liabilities. The [EBT] trustees might charge you interest.”

It continues: “You still need to tell us what you’ve decided to do. If you haven’t completed all the necessary steps through our portal by 31 January 2019, it is likely to cost you more to resolve your loans and end your involvement in the trust. You may have outstanding tax liabilities and you will still have outstanding loans if you do nothing. You are most likely to save money if you act now.”

Computer Weekly understands that people contacted by Trust Help Line have been additionally provided the possibility to have their excellent loans launched and cancelled in the event that they have been keen to pay 5% of the whole mortgage quantity.

It is unclear what number of contractors complied with this request, or equipped their particulars to Trust Help Line forward of its 31 January 2019 deadline.

According to Companies House, Helpline Services (which was integrated in December 2017) is because of be dissolved throughout the subsequent few months, following the submitting of an utility to be struck from the Companies Register in January 2020.

A message on the Trust Help Line web site states that its on-line portal has lengthy since been decommissioned and all the data it beforehand held on contractors relating to their mortgage agreements has now been returned to the unique trustees. “Our obligations are fulfilled and our work is complete,” it says.

There can also be an instruction to contact one other organisation, Dor Resolution, if folks visiting the location nonetheless require help with having their excellent loans written off. That organisation stays lively, however has since undergone a reputation change to Fiscus Management.

Computer Weekly contacted Fiscus Management for touch upon this story, however no response was obtained on the time of writing.

Why recall the loans now?

Another couple of questions that persist in all this are: why did FS Capital and Felicitas determine to accumulate the money owed from these trusts within the first place, and why have each organisations sought to start out recalling these loans now?

Requests made to Felicitas for clarification on this level stay unanswered, whereas FS Capital provided a response that gives some perception into the timing of its actions, though its motivation for buying the loans from Pinotage in late 2019 stays one thing of a thriller.

What is understood is {that a} Switzerland-based firm known as Pinotage acquired the FS Capital loans from the unique scheme trustee, a Jersey-based outfit often called Praxis IFM, a while in 2018 and commenced notifying contractors shortly after that about their mortgage cost obligations.

Under the phrases of the coverage, contractors have been instructed by Pinotage to come back ahead and register their curiosity in reaching a settlement with HMRC by 5 April 2019, which, on the time, would have been payable by 31 January 2020.

“If you have not settled and have not repaid the loans, you are now subject to the April 2019 loan charge,” Pinotage advised contractors in an e mail despatched in early 2019, as a part of a concerted push by the organisation to get beneficiaries to succeed in a settlement with HMRC.

This e mail additionally alluded to some difficulties the corporate had run into with getting contractors to interact and hold involved with the agency, and the way, consequently, the prices concerned with retaining the belief operating weren’t being met.

“It is simply not viable for the trustee to keep the trust running where beneficiaries, and debtors, do not engage with the trustee,” stated the e-mail, seen by Computer Weekly. “A professional trustee is entitled to reasonable remuneration, which shall be paid from the assets of the trust. An outstanding loan is an asset, which can be recalled in full to cover such fees.”

The firm provided to launch the loans of people in search of a settlement with HMRC for a “flat fee” of £950, however went on to say that the shortage of response to its previous communications meant it might think about “all options” open to it as soon as the 5 April 2019 mortgage cost settlement deadline handed.

“Unfortunately, the trustee is unable to ignore the loans that are in place and must look to deal with them,” the e-mail warned.

It additionally alluded to the dangers posed to the trustees and contractors if the trusts stay lively and the loans stay in place, given the “ever-changing tax landscape” as regulators in a “number of jurisdictions have expressed a distinct preference for the loan position of such trusts to be resolved, and the trusts to be wound down as soon as possible”.

According to the assertion from FS Capital, Pinotage acquired the loans on the understanding that its possession of them can be comparatively short-lived and the loans resolved, given the looming risk of the mortgage cost deadline.

“Pinotage was of the belief that this was a short-term assignment as all the beneficiaries of these arrangements had in reality a choice of either settling with HMRC, and subsequently writing off their loans for a small fee, or repaying their loans – both events to occur before 5 April 2019,” stated FS Capital.

“The option of settling with HMRC failed to happen for most contractors due to the combined incompetence of HMRC and the failure of many accountants to actively calculate their clients’ liabilities instead of waiting for settlement figures from HMRC.”

Computer Weekly put this model of occasions to HMRC’s press crew, who responded with an announcement claiming that “thousands of customers settled their use of disguised remuneration schemes ahead of the 5 April 2019 deadline” and, in doing so, have exempted themselves from having to pay the mortgage cost.

Computer Weekly additionally understands that HMRC’s personal information means that 99% of scheme customers who sought to resolve their involvement in mortgage schemes with HMRC obtained a settlement calculation by August 2019.

The HMRC assertion stated: “As a part of the authorities’s response to the [loan charge] impartial evaluation, mortgage cost prospects got extra time to file their 2018/19 self-assessment tax return. The deadline is now 30 September 2020.

“We perceive that some prospects who’ve been partaking with us to agree a settlement could also be apprehensive about with the ability to finalise their settlement by this time.

“We will continue to help these customers to give them certainty and anyone with concerns should contact the settlements helpline on 03000 534 226.”

Contractor inaction prompts mortgage recall motion?

Even so, FS Capital is of the view that the lack of many contractors to succeed in a closing settlement with HMRC, coupled with a scarcity of curiosity in writing off their loans, have been elements in why Pinotage acted to offloads these loans when it did.

“All these factors meant that, as at 6 April 2019, Pinotage SARL remained the trustee of these trusts and most of the original loans were still in place,” stated FS Capital. “The trustees now faced a major problem, as throughout their period of trusteeship, most of the beneficiaries refused for whatever reason to engage with them.” 

At the identical time, the corporate had generated little or no in the way in which of revenue from its provide to jot down off the loans for contractors, prompting it to take steps promote them on.

“Pinotage SARL consequently recognised shortly after 5 April 2019 that, from both a financial and regulatory perspective, it could not keep the contractor trusts going and resolved to exit the structures by 31 December 2019,” stated the FS Capital assertion.

“This is where FS Capital comes in as its shareholders were well aware of Pinotage and entered into discussions with them for FS Capital to acquire the various tranches of debt held by the trustees for value.”

For now, this case stays a growing story, because the contractors caught within the crosshairs of the respective FS Capital and Felicitas Solutions’ letter-writing campaigns face an anxious wait to see whether or not they are going to be anticipated to pay again these historic loans. If so, the top result’s more likely to be devastating, with monetary damage being an end result for a lot of.   

At the identical time, contractors will little question be hoping that the Loan Charge APPG’s name for some type of authorities intervention within the matter will likely be heeded. But, till then, the fall-out from HMRC’s controversial mortgage cost coverage continues.

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