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Contractors – the ‘loans’ you never needed to repay

Posted: 08 Nov 2022
Ruby Keeler-Williams
Chartered Legal Executive
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In this article, Ruby Keeler-Williams and Richard Gray Barrister of Elysium Law consider claims made against loan charge contractors and the litigation which subsequently ensued and is contemplated going forward.

The ‘Contractor Loan Scheme’ Planning

The ‘contractor loan scheme’ was part of a large-scale marketed tax avoidance scheme. The user would usually be an individual working for what is called an umbrella company or for their own personal service company. Normally, that would attract tax and NICs on a PAYE basis. The responsibility for paying such statutory deductions falls upon the employer. However, in an attempt to reduce tax liability, the employer, who would be acting under a contract of employment would pay the employee the minimum wage and then do one of two things:

  • Pay lumps sums to a trustee who would ‘loan’ the employee (now beneficiary under a trust) money (remuneration) with the arrangements setting out the terms of the repayment.
  • Alternatively, the employer would directly loan the monies collected and then assign the loans to a trust later.

By way of example; if an employee was paid a salary of £150,000, only a basic minimum wage would be paid. Then 85% of what was left (collected by the umbrella company) was ‘loaned’ to the employee and the umbrella would take what was left. It was argued under these schemes that the loan did not constitute earnings and as such was not taxable. “Don’t worry we have Counsel’s advice” was the normal selling point.

Another and more significant inducement was made to the employee that the loan would never need repaying. We have a particular legal view on that arrangement but at he very least it was a misrepresentation which materially induced the employee to enter the contractual arrangements.

The Assignment out of the Trust

Unusually, the purported ‘loans’ in many cases have been assigned out of the Trust and have either directly or via other companies ended up being assigned to a company named Felicitas Solutions Ltd, which was formed and based in the Isle of Man. The company appeared to be purposely set up to receive these assignments and pursue claims for reimbursement from behind the corporate veil, as they threatened to do.

The users of these schemes were then contacted with demands for repayment and as a result many sought advice from Elysium Law and we were instructed by a large group to defend these claims.

The Claims

The ‘demand for repayment’ letters received by Our Clients did not constitute a compliant Letter of Claim under the Pre-Action Protocol. As such, we insisted that prior to providing a response, a compliant Letter of Claim must be produce supported by evidence.

In early 2021, this was provided to us and some 107,000 pages of documents were disclosed and reviewed.

It was clear from the review of these documents, together with evidence from Our Clients, that the loans were ‘circular’ and were never intended to be repaid. This was clearly a tax avoidance arrangement, and the loans were, in our view, unenforceable.

Our stance  was to offer a mediation in order to narrow the issues in dispute.

Following that Mediation, Elysium Law subsequently served upon Felicitas a comprehensive letter of response that rebutted the claims on the following grounds:

  • Collateral Contract and/or Misrepresentation, in that a legal assignment is subject to existing causes of action which are not avoided by assignment (Bibby Factors Northwest Ltd v HFD Ltd). This means that the Beneficiaries may raise against the assignee, any defence, set-off or counterclaim which they could raise if sued by the assignor. Here, there was a verbal collateral contract made that this was a tax avoidance arrangement and that the ‘loan’ would never be enforced against them.
  • Breach of Trust, in that the Trusts into which the user’s money paid was subject to both express and implied fiduciary obligations. The assignment would likely have substantially devalued the assets of the trust and has exploited the beneficiaries.

After service of the letter of response, to which we received no reply, the threat of litigation seemed to disappear.

However, Elysium Law are now aware that last week, a large number (if not all) of these ‘loans’ have been assigned by Felicitas to a company known as West 28th Street Limited, who have subsequently sent letters demanding repayment, albeit they have made an offer to settle at a reduced rate of 50% adding that if the offer is not accepted they will instruct Solicitors to claim from the recipients. We have been contacted by our previous clients seeking further advice and have organised conferences after hours to assist them.

Our view is that action must be taken to ensure that these demands for repayment and subsequent assignments do not continue.

Elysium Law have a litigation strategy to bring these claims to an end. If you have received one of these demands from Felicitas or West 28th Street Limited and wish to have advice on this matter, please contact Elysium Law on 0151 328 1968 or via

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