If you’re unfamiliar with the Loan Charge, read my initial blog on it HERE and my Spectator article HERE. Today there’s been a major development with the House of Lords Economic Affairs Committee issuing a damning report about HMRC’s conduct. It says taxpayers are being treated unfairly by HMRC, which has become too powerful. The Committee says that HMRC is failing to “discriminate effectively” between the different kinds of activities it classifies as tax avoidance.
The committee concludes…
The criticisms levied at the loan charge included its retrospective nature and its failure to pursue taxpayers proportionately to their circumstances. HMRC is clearly prioritising recovery of back taxes over justice by targeting individuals, rather than promoters, so it can more easily recover liabilities. And they are trying to recover back taxes going back twenty years! There is a clear difference in culpability, for example, between deliberate and contrived tax avoidance by sophisticated, high-income individuals, and uninformed or naive decisions by unrepresented taxpayers.
Lord (Michael) Forsyth, the former Major government cabinet minister, and chairman of the committee said…
HMRC is right to tackle tax evasion and aggressive tax avoidance. However, a careful balance must be struck between clamping down and treating taxpayers fairly. Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer should expect. This [the loan charge] is devastating the lives of middle and lower income individuals, from the private and public sector, including the National Health Service, who used disguised remuneration schemes, in many cases being required to do so by their employers.
Lord Forsyth said the committee had found “disturbing” evidence on the government’s approach to the charge, which he said was retrospective in its effect, claiming tax from years which should be closed to enquiry under any normal rule of precedent.
HMRC, however, are having none of it. A spokesperson said…
On the loan charge in particular, it is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.
Parliamentary awareness has been steadily growing. Stephen Lloyd MP tabled an Early Day Motion on the loan charge on 8 May 2018, which has more than 100 signatures. Conservative MP Steve Baker sponsored a Westminster Hall debate on the loan charge on 20 November, in which more than 25 MPs from different parties raised concerns about the issue. Baroness Noakes and Baroness Kramer, both members of our Finance Bill Sub-Committee, raised it in the House of Lords on 13 November.
Let’s look at some of the content of the Economic Affairs Committee report, which few seem to have reported on. Here’s a Case Study which they quote from one of their witnesses, Graham Webber of WTT…
I have a client who is a social worker. She was made redundant by her local council. … It has a farewell party on the Friday and on the Monday it said “If you join this agency and use the scheme, we will re-engage you as a contractor.”… She … was re-engaged as a contractor for five years … At the end of those five years, the council told her it would re-employ her as an employee, which it did. She was unaware of what was going on. She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it. She is the only worker in that particular house; she has a young child and her spouse stays at home. If she goes bankrupt and it comes up on her next criminal records check, she cannot work. This is not a rich merchant banker who has done something wrong. This is a dedicated social worker. That encapsulates what the loan charge does; it is unfair and pernicious … Yes, my contractor benefitted because she paid less tax. The Revenue was supine and silent and by its silence gave tacit approval to these schemes. In fact, that was used in the schemes’ marketing: no approach from the Revenue meant they were Revenue approved … The county council did not warn her, and the people behind the agency running the scheme, as is usual in these cases, were selective about the information that was made available. You could argue that she should have investigated and should have known more about this, but she is a social worker, she is not a tax expert … How could a social worker be expected to penetrate that type of arrangement? It is just unfair.
I have had dozens of similar stories from people who phone in to my radio show.
Here are some important excepts from the Committee Report…
Many witnesses said they had joined these schemes without being aware of HMRC’s attitude towards them. They were assured by their employers or promoters of the schemes that they were effective (sometimes with legal opinions) and that HMRC knew about the schemes and approved them. HMRC did not do enough to counter this misinformation. It used its “Spotlight” online guidance publications to make known its views, but this is little read, and one witness said these schemes were not mentioned there until as late as 2016.68 Some interpreted the fact that no action had been taken against these schemes, despite the fact that they may have been disclosed under the Disclosure of Tax Avoidance Scheme Rules (DOTAS), as evidence of HMRC acquiescence.
Many participants told us they declared their involvement in the schemes to HMRC but HMRC did not warn them that it intended to, or was, challenging the schemes. HMRC took a test case (“the Rangers case”) to challenge the schemes. The first appeal was heard in 2010. It was not until 2017 that the Supreme Court published its judgment in HMRC’s favour. HMRC announced the loan charge legislation in 2016.
Some affected witnesses told us that HMRC had raised no enquiries on their tax returns. For others, HMRC opened enquiries but did not progress them for long periods of time, even when the taxpayers proactively cooperated. This has led taxpayers to feel that HMRC was deliberately delaying the conclusion of enquiries. Some felt that HMRC is using the loan charge to cover up its own failures to act in a timely manner.
The charge was also considered to be retrospective in its effect, because in many cases the tax years it relates to are closed. In normal circumstances HMRC would be unable to reopen these tax years if they could not prove failure to take reasonable care (to go back six years) or fraud (to go back 20 years). The loan charge triggers a charge in 2019/20 on the cumulative loan value advanced since April 1999 and not repaid by April 2019. Witnesses said that no additional income was generated to pay that tax and the whole liability falls in a single year ensuring that much of the tax is payable at higher rates.
Many witnesses were not expecting that they would ever have to repay the loans so made no provision to do so. They now face, in several instances, tax bills of tens of thousands of pounds without the means to pay. For some their circumstances have changed significantly in the meantime with retirement, unemployment, illness or divorce depleting their resources.
If you want to read the full section of the Lords Economic Committee Report click HERE.
This report is important. In the end the government must gt a grip on this. At the moment they show no sign of doing so, so it will be up to backbenchers and the media to keep up the pressure.