In a wider report titled ‘The Powers of HMRC: Treating Taxpayers Fairly’, the House of Lords’ ‘Economic Affairs Committee’ devotes a chapter to the 2019 loan charge and has called for the retrospective legislation to be amended to exclude those loans made in years where individuals disclosed their participation in schemes to HMRC or which would otherwise have been “closed”.
The Report: The Powers of HMRC: Treating Taxpayers Fairly (PDF)
The Committee received a raft of evidence, mainly from those caught by the loan charge or advisers who had clients affected by the legislation. This evidence explained the impact the charge had upon people and what they felt was disproportionate or unfair about the way that HMRC had acted.
Some evidence exists 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:
Concerns about retrospection and the impact on individuals were briefly raised by the Opposition but not followed up by further debate.
Many witnesses said they had joined loan schemes unaware of HMRC’s attitude towards them. They were assured by either employers or scheme promoters that they were kosher and that the Revenue knew about the schemes and approved them. HMRC however did not do enough to dispel this myth. Instead, the department used its ‘Spotlight’ online guidance publications to broadcast its views, but this is not read by a wide audience. Some interpreted HMRC’s lack of action taken against these schemes as the department rubber stamping them.
Even when participants volunteered their involvement in the schemes to HMRC, the Revenue neglected to warn them that it was going to challenge such tax avoidance instruments.
Some scheme users had never had their tax returns enquired into and those that did had to wait a long time for HMRC to progress the investigation. This has led to taxpayers suspecting that HMRC deliberately delayed the conclusion of enquiries.
The unfairness of the loan charge, which taxes the contractor rather than the employer (in the event that the employer has vanished or has no assets), is highlighted by witnesses who told the Committee that many employers had denied workers standard employment contracts but encouraged employees and contractors to use the agencies or companies that promoted loan schemes. In some cases, this was a condition of being offered the work!
Witnesses quite rightly considered the charge to be retrospective as it triggers a tax charge at 6th April 2019 on cumulative loans advanced since April 1999 and not repaid by 5th April 2019.
Many freelancers never expected to have to repay the loans so made no provision to do so. They now face, in some cases, the daunting prospect of tax bills of tens of thousands of pounds but without the means to pay. For some, their circumstances have changed significantly in the meantime with retirement, unemployment, illness or divorce, which has dented their resources and therefore their ability to meet the tax arrears.
The Committee agrees that the loan charge is retrospective in its effect and that there were unreasonable delays in legislating. There are already time limits laid down by Parliament for HMRC to investigate matters, i.e. 4 (normal circumstances), 6 (careless behaviour) and 20 years (deliberate behaviour) which afford taxpayers certainty about their affairs. It undermines this framework.
In its retrospective effect, and its failure to pursue taxpayers proportionately to their circumstances, HMRC’s approach to the loan charge substantially moves away from the principles in the Powers Review, whereby HMRC agreed to “support those who seek to comply but come down hard on those who seek an unfair advantage through non-compliance.”
HMRC has a range of powers to deal with promoters of tax avoidance schemes, yet the Committee saw scant evidence of action being taken against such promoters. Instead, the Revenue appears to be prioritising recovery of tax over justice by targeting individuals rather than the promoters, so it can more easily recover revenue.
Several witnesses who had no means to pay tax bills or reach a settlement within a set time, said they were threatened with bankruptcy which the Committee found disturbing.
Others reported having suicidal feelings.
Rather than deferring to ‘Spotlight’, the Committee want HMRC to do more to publicise any actions it takes against scheme promoters.
The loan charge legislation was introduced by the Government and passed by Parliament. HMRC is obliged to implement that legislation and on that basis the Committee say that the Revenue should not be held wholly responsible for its basic principles.
Disguised remuneration schemes were denounced by the Committee as “unacceptable tax avoidance”, which HMRC were right to pursue. All individuals using these schemes therefore must accept some degree of culpability for placing an unfair burden on taxpayers who play by the rules.
In conclusion, the Committee has made the following recommendations:
Whilst the Committee’s report and recommendations are welcomed, some affected contractors may feel they do not go far enough and that this has all come too late in the day. Will HMRC take any notice? I fear not, although they have said that they are assessing the evidence assembled by the Committee.