The Unjust Rejection of PAYE Credit in Loan Charge Settlements

The Central Injustice: Shifting Liability from Employer to Worker

In the ongoing debate surrounding the Loan Charge, a fundamental issue has returned to the fore: the refusal of HMRC to apply PAYE credit in settlement calculations where UK employers failed to deduct and remit tax at source. This issue, recently highlighted again by the All Party Parliamentary Loan Charge and Taxpayer Fairness Group (APPG) in their letter to HMRC, strikes at the heart of our tax system’s fairness and the rule of law.

How PAYE Operates – And Where Liability Rests

The Pay As You Earn (PAYE) system, enshrined in UK law for nearly a century, is clear in its operation. Employers are responsible for deducting income tax and National Insurance contributions from employee wages and remitting them to HMRC. The law is explicit: it is the employer’s statutory duty to collect this tax at source, not the employee’s. This principle is not a bureaucratic technicality; it is a cornerstone of the relationship between workers, employers, and the state.

When an employer fails to fulfil this duty, the law provides mechanisms for HMRC to recover unpaid tax directly from the employer. Only in rare and specific circumstances—such as where the employer is insolvent and HMRC can prove the employee knew tax was not being paid—can HMRC pursue the individual worker. This protects the integrity of the system and the reasonable expectations of taxpayers.

“It is a grave departure from established tax principles to hold individuals liable for tax HMRC failed to collect at source from their employers.”

The Loan Charge and the Omission of PAYE Credit

In the context of the Loan Charge, thousands of contractors participated in arrangements promoted and implemented by UK-based employers or umbrella companies. The majority acted in good faith, relying on their employers and professional advisers to ensure compliance. Where HMRC failed in its statutory duty to enforce PAYE on these employers, it is now seeking to recover the shortfall from individual contractors without allowing a PAYE credit.

The APPG’s recent letter draws sharp attention to this point, expressing both surprise and deep concern that HMRC has continued to ignore the principle of PAYE credit, despite its clear legal and moral basis. The letter reminds HMRC that independent tax professionals repeatedly proposed the PAYE credit solution as a fair and workable approach during prior consultations. The APPG’s intervention is timely, bringing the injustice back into public focus and demanding scrutiny from policymakers and the public alike.

Why Refusing PAYE Credit Is a Serious Departure from Principle

The refusal to grant PAYE credit in these settlements marks a fundamental departure from established tax principles:

• Breach of Statutory Duty: By shifting liability to individuals, HMRC effectively absolves itself of its failure to enforce the law on employers.

• Erosion of Trust: Taxpayers are entitled to expect that the law will be applied consistently and fairly. When HMRC changes the rules after the fact, confidence in the system is severely damaged.

• Unjust Burden on Individuals: Many affected contractors acted in good faith, relying on the legal framework and their employers’ compliance. Retroactively penalising them is manifestly unfair.

Table: PAYE Liability in Law vs. Loan Charge Settlements

The APPG’s Role: Bringing Public Accountability

The APPG’s letter is significant not only for its substance but for its timing. By explicitly raising the issue in the context of the ongoing review, the APPG is ensuring that this fundamental point cannot be swept aside. Their call for further discussion and transparency is precisely what is needed to restore faith in the process.

“The refusal to apply PAYE credit is both unfair and contrary to the principles underpinning our tax system,” the APPG states. Their intervention demonstrates parliamentary concern that the current approach is not merely a technical oversight, but a matter of justice.

Why PAYE Credit Is a Workable Solution

Independent sector professionals have long argued that the PAYE credit is not only legally sound but practical. Applying PAYE credit would:

• Align with the law as written and intended

• Prevent double taxation of the same income

• Avoid punishing individuals for the non-compliance of others

• Provide a credible basis for settlements and avoid protracted disputes

That HMRC has ignored this solution, despite repeated representations and the clear interests of justice, raises serious questions about accountability and responsiveness.

Implications for the Tax System and Beyond

This issue goes beyond the Loan Charge. If HMRC can, with impunity, shift the consequences of its own enforcement failures onto individual taxpayers, the principles of fairness before the law and accountability are at risk. Such a precedent would undermine public trust not just in the tax system, but in the rule of law itself.

A Call for Justice and Fairness

Without the application of PAYE credit, the Loan Charge settlement process cannot be described as just or balanced. For those who acted in good faith under mass marketed arrangements, the refusal to acknowledge HMRC’s own failures is an affront to fairness.

Restoring trust requires that HMRC revisit its position, heed the concerns of the APPG and independent experts, and apply PAYE credit where it is due. Only by doing so can the principles of the tax system—and the public’s faith in it—be preserved.

Contractors and professionals should actively engage with their representatives and HMRC, insisting on transparent and legally sound settlements.

For those affected, now is the time to seek advice, share your experience with the APPG, and demand a process that is not only efficient, but fundamentally fair.