HMRC 2019 Loan Charge
Posted on 26th March 2019 at 15:07
Following long, complex technical issues surrounding counter avoidance issues within HMRC and particularly the awaited implementation of legislation in respect of the 2019 Loan Charge, the matter was discuss in the House of Lords Economic Committee and the report from the meeting was published on 4 December 2018. The report details the following that was discussed….
This chapter deals with evidence received on HMRC’s use of its powers that particularly related to the 2019 loan charge. This was the most frequently raised issue in response to our call for evidence. Not only did the Committee receive a great deal of written evidence on this issue, but we also received a large volume of correspondence. We are grateful to all those who shared their experiences with us.
The loan charge
54. The loan charge is shorthand for the measures introduced by the Finance (No. 2) Act 2017 to combat “disguised remuneration” schemes, a form of tax avoidance. These complex arrangements led to substantial amounts of pay being directed by an employer to an employee benefit trust and paid to the employee by way of a loan. This was intended to avoid tax and National Insurance Contributions (NICs) for the payee, and employers’ NICs for the payer. The schemes were heavily marketed to the self-employed and those with personal service companies, working as contractors. In many cases there was never any expectation of the loan being repaid.
55. Legislation to counter these schemes was first introduced in Finance Act 2011. While the 2011 legislation looked forwards, the 2017 legislation looks backwards, bringing into charge to income tax the value of all loans made under these schemes on or after 6 April 1999 which are outstanding at 5 April 2019. Only if taxpayers agree with HMRC to voluntarily settle tax avoided for all years closed to inquiry since 1999, plus tax and interest for years since then under inquiry, can the charge be avoided. 56. Many of the responses we received were from people who were caught by the loan charge or had clients who were affected. They provided a wealth of evidence about the impact of the charge in practice and what they felt was disproportionate or unfair about the way that HMRC had acted. Further examples can be seen in Appendix 5.
The loan charge 2019: a case study
“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.” Source: Q 40 (Graham Webber)
57. The loan charge legislation was introduced by the government and passed by Parliament. HMRC is obliged to implement that legislation, and should therefore not be held wholly responsible for its basic principles. Witnesses were concerned both with the legislation itself, and HMRC’s approach to disguised remuneration schemes more generally.
58. There is some evidence that Parliament did not adequately scrutinise the loan charge. In the Public Bill Committee of the Finance (No. 2) Act 2017, debate consisted of only three contributions—an introduction from the Financial Secretary to the Treasury, a response from the Opposition, and a further response from the Minister. Concerns about retrospection and the impact on individuals were briefly raised by the Opposition, but not followed up by further debate.62
59. Now the loan charge itself is fast approaching, parliamentary awareness has been growing. Stephen Lloyd MP tabled an Early Day Motion on the loan charge on 8 May 2018, which has more than 100 signatures.63 Steve Baker MP secured a Westminster Hall debate on the matter on 20 November 2018, in which more than 25 MPs from different parties raised concerns about the issue.64 Baroness Noakes and Baroness Kramer, both members of our Finance Bill Sub-Committee, raised this issue in the House of Lords on 13 November
60. Many witnesses said they had joined these schemes without being aware of HMRC’s attitude towards them.66 They were assured by their employers or promoters of the schemes that they were effective (sometimes with legal opinions)67 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.
61. 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. 70 HMRC took a test case (“the Rangers case”71) 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.
62. Some affected witnesses told us that HMRC had raised no enquiries on their tax returns.72 For others, HMRC opened enquiries but did not progress them for long periods of time,73 even when the taxpayers proactively cooperated.74 This has led taxpayers to feel that HMRC was deliberately delaying the conclusion of enquiries.75 Some felt that HMRC is using the loan charge to cover up its own failures to act in a timely manner.76
63. The judgment in the Rangers case found that the loans advanced constituted earnings for tax purposes. Not only was the amount taxable on the employee, but the employer should have applied PAyE.77 The loan charge legislation does not tax the employer, who may be liable for the PAyE under case law, but the recipient of the loan, whether an employee or a contractor. Witnesses told us that many employers had denied workers standard employment contracts but encouraged employees and contractors to use the agencies or companies that promoted such schemes, in some cases as a condition of getting work.78 Individuals said it was unfair that they should bear the loan charge, rather than the organisations which hired them or promoters who had also benefitted by saving employers’ National Insurance contributions or from fees.79 As Keith gordon said, “the problem is the legislation goes for the person least able to defend him or herself.”80
64. The charge was also considered to be retrospective in its effect,81 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.82
65. 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 some 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.83
Tagged as: HMRC Legislation
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