A tranche of IT contractors, already facing life-changing tax bills as a result of the government’s controversial loan charge policy, have been hit with another wave of payment demands relating to their past involvement in loan-based remuneration schemes.
The affected contractors are known to have started receiving letters from a company known as West 28th Street on Wednesday 2 November 2022, informing them that the loans they received in-lieu of a salary while participating in these schemes have been assigned to the company and need repaying.
According to Companies House, West 28th Street was set up in February 2021 and is not due to file its first accounts until 27 November 2022.
Previously, these loans had been looked after by a company called Felicitas Solutions, which sent out similar letters in early 2020, demanding that contractors repay any loans received for contracts they completed from late 2012 onwards.
The loans were typically paid to contractors via schemes set up by third-party, offshore employee benefits trusts (EBTs) and were often positioned as a means of legally minimising participants’ employment tax liabilities.
As previously documented by Computer Weekly, participants in these schemes were assured by the operators of the EBTs at the time that the loans would never be recalled.
In recent years, however, the loan books and accompanying debts have been sold on by the EBTs to third parties like Felicitas, which have then sought to recoup the loans by issuing contractors with payment demands, in some cases totalling tens of thousands of pounds.
At the same time, many of these same contractors are also in scope of the government’s controversial loan charge policy, which has seen HM Revenue & Customs (HMRC) pursue them for the tax it claims they avoided paying while participating in these schemes.
Cheshire-based legal firm Elysium Law was instructed by hundreds of contractors in late 2020 to investigate the Felicitas letters and ascertain whether there was any merit to the company’s demands.
According to Richard Gray, a barrister at Elysium Law, this exercise began with his firm requesting a letter of claim from Felicitas, which responded with a lengthy letter of its own and 107,000 client documents.
After reviewing the documents, Elysium concluded the contractors in Felicitas’s crosshairs owed it nothing, and prepared its defence on their behalf accordingly.
“We reviewed those 107,000 documents… and had this lengthy one-day mediation with them, where the idea was to get Felicitas in front of us and explain the difficulties they would have if they brought the claim – both logistically and legally,” Gray told Computer Weekly.
David Brogelli, finance and practice manager at Elysium Law, said after explaining the “weaknesses in their case and the strengths of our defence” during mediation, and highlighting the fact Felicitas would incur huge fees if it attempted to get the case tried in court, the company seemingly backed down.
“They outlined their claim and we outlined our defence and then Felicitas opted not to take it further. They dropped arms and stopped pursuing anybody,” he said.
The mediation with Felicitas took place on 12 November 2021. Now, 12 months on, the matter has reared its head again, with the arrival of the letters from West 28th Street.
Brogelli and Gray said Elysium Law would be challenging West 28th Street’s attempts to recall these loans, while also working to resolve the matter on behalf of its clients for a final time, but it needs the support of more contractors who are being chased by the firm for loan repayments, the pair said.
“As a result of our investigations during the Felicitas case, we realised contractors potentially have a breach of trust claim against the original trustees [of the EBTs] because they had transferred the assets, in this case the ‘loans’, out of the trust,” said Brogelli.
“We could do that as a joint claim to get a declaration from the court to say, essentially, these loans are unenforceable, and also look at pursuing the original trustees potentially for damages if tax charges have arisen from the transfer.”
This is a course of action the firm was looking to take first time around with Felicitas, but once the firm seemingly backed off from pursuing contractors for the money it claims they owed, client interest dropped off.
“We had a number of clients who were obviously happy they weren’t being bothered anymore, and the number of clients that did sign up was good, but not quite enough to make it worthwhile for them all cost-wise,” he continued.
What the firm did do at the time, in anticipation another party might one day end up owning the debt, is write an open letter to “anybody to whom the loans might be assigned in future” setting out its plan to bring an “action for declaration” in the courts that the loans are unenforceable.
Richard Gray, Elysium Law
And with West 28th Street now picking up the mantle and seeking to recall these loans again, it should highlight why everything that can be done to bring this matter to a final stop should be pursued by the affected contractors.
“In the wake of the West 28th Street threat, we’ve had a lot more interest, and now most of our clients want to sign up to this action, and we’ve been approached by a number of people who were not our clients originally too,” said Gray. “But – obviously – the more people that join this action, the less the cost per person will be.”
He also confirmed West 28th Street has indicated its intention to instruct solicitors of its own next month to fight back against Elysium’s claims.
“We’ve had very strong advice from expert counsel, and this has nothing to do with tax. It’s about stopping the enforcement of the loans,” he continued. “If West 28th Street want to issue claims against our clients, or if anybody else wants to join our group, then believe me, we will push back in a very significant and robust way. And we are confident of success.”
Computer Weekly contacted West 28th Street for a comment on this story, but had received no response at the time of publication.
Meanwhile, any contractors looking to find out more information about Elysium’s work on this matter, or interested in joining its group claim, are advised to email the firm at [email protected].