Can Contractors Challenge Historic Loan Charge Settlements in Light of New Settlement Terms?

Introduction

The UK Loan Charge remains one of the most controversial tax measures in recent history. Introduced to recover tax from contractors and freelancers who received income through disguised remuneration loan schemes, it has left many facing substantial and unexpected liabilities.

Enacted through the Finance (No. 2) Act 2017, the Loan Charge treated outstanding loans as taxable income as at 5 April 2019, regardless of when the loans were originally taken. This resulted in large retrospective tax bills and prompted sustained criticism from affected taxpayers, parliamentarians, and professional bodies.

Following years of campaigning and scrutiny, the Government announced significant reforms in late 2025 after an independent review led by Ray McCann. These changes include a new settlement scheme offering materially more favourable terms, recalculating liabilities as if tax had arisen in the years the loans were made and providing a range of additional concessions.

This has reignited a key question: do contractors who already settled under earlier, harsher terms have any legal basis to argue that the new settlement terms should apply retrospectively — or that overpaid tax should be refunded?

Background — The Loan Charge and Recent Reforms

What Is the Loan Charge?

The Loan Charge was enacted through Schedules 11 and 12 of the Finance (No. 2) Act 2017. It deems outstanding disguised remuneration loans to be employment income subject to income tax and National Insurance contributions, regardless of when the underlying arrangements were entered into.

Although originally wider in scope, the charge was partially softened in 2019 following an earlier independent review. Loans made before 9 December 2010 were removed from scope, leaving only loans made on or after that date subject to the charge.

The New Settlement Terms

Under the Government’s response to the McCann Review, individuals who have not yet settled can now access significantly improved settlement terms, including:

• Tax calculated as if it had arisen in the years the loans were made

• Automatic deductions (including a £5,000 allowance)

• Removal of late payment interest

• Inheritance tax relief and other concessions

These reforms have reignited debate about fairness. Contractors who settled earlier — often under intense financial pressure — typically paid substantially more. Many now question whether comparable relief should be extended to those who settled before the reforms were announced.

Legal Framework — Key Statutory and Legal Principles

1. Statutory Basis of the Loan Charge

The Loan Charge is grounded in primary legislation. As a result, settled liabilities can only be reduced or reversed where:

• Parliament has expressly provided for retrospective relief or refunds; or

• There is a statutory right of appeal, review, or repayment.

While the Finance (No. 2) Act 2017 grants HMRC discretion to operate settlement schemes, it does not create a general statutory right for taxpayers to reclaim tax simply because settlement terms have since improved.

2. HMRC Guidance on Voluntary Restitution and Refunds

HMRC guidance does allow refunds in limited circumstances, particularly where voluntary payments were made to prevent the Loan Charge arising and subsequent changes mean those loans now fall outside scope (for example, pre-2010 loans or loans properly disclosed where no enquiry was opened).

This guidance is relevant because:

• It shows that HMRC accepts refunds may be appropriate where the legal basis for taxation has changed;

• However, it is narrowly framed and does not provide a blanket mechanism for refunding historic settlements made under earlier terms.

3. Legal Concepts Relevant to Retrospective Application

A. Judicial Review

Some have suggested judicial review as a route to challenge the differential treatment between taxpayers who settled early and those who have not yet done so. Arguments may focus on irrationality, unfairness, or unequal treatment.

In theory, retrospective tax measures can engage human rights considerations, including Article 1 of Protocol 1 to the European Convention on Human Rights (the right to peaceful enjoyment of possessions). In practice, however, tax legislation is afforded a wide margin of discretion, and the threshold for successful challenge is high.

To date, judicial challenges to the Loan Charge and related enforcement mechanisms have been unsuccessful, with courts consistently upholding Parliament’s authority in this area.

B. Equitable Relief and Frustration

Doctrines such as frustration or general equitable relief do not provide a basis for unwinding settled tax liabilities. Courts are extremely reluctant to interfere with completed tax assessments or settlements in the absence of a clear statutory entitlement or procedural defect.

4. Timing and Administrative Windows

Where HMRC does offer repayment or refund mechanisms, these are typically subject to strict application processes and time limits. Once these administrative windows close, opportunities for challenge become significantly more limited.

Arguments for Retrospective Application or Refunds

A. Fairness and the Rule of Law

A central criticism is that two taxpayers in effectively identical positions may end up paying vastly different amounts simply due to timing. This raises concerns grounded in rule of law principles and echoes earlier parliamentary criticisms of the Loan Charge’s retrospective effect.

However, while these arguments carry political and moral weight, general notions of fairness do not override clear statutory provisions in UK tax law unless they intersect with express legal or human rights protections.

B. Human Rights Considerations

Article 1 of Protocol 1 has featured prominently in legal commentary around the Loan Charge, particularly in relation to retrospective taxation and proportionality. While these arguments provide important context, they have not succeeded as standalone grounds for overturning tax charges or reopening settled liabilities.

Conclusion — What Legal Grounds Might Exist?

For contractors who settled under earlier Loan Charge terms, the scope for legal challenge remains limited. Key points to consider include:

• Statutory limits: The Loan Charge is rooted in primary legislation. Without further legislative intervention, only narrow statutory refund mechanisms are available.

• Administrative routes: HMRC guidance permits refunds in specific circumstances where loans are no longer within scope, but does not extend to wholesale retrospective application of new settlement terms.

• Judicial review: Frequently suggested, but historically unsuccessful where no clear illegality or procedural flaw exists.

• Human rights arguments: Useful for contextual and policy debate, but unlikely to create an automatic right to repayment.

• Fairness considerations: Compelling from an equity perspective, but insufficient on their own to reopen settled tax liabilities.

Ultimately, while the revised settlement terms represent a significant shift in approach, any broad retrospective relief for those who settled early would almost certainly require explicit legislative action rather than litigation.