HMRC needs new strategy for loan charge scandalby
As MPs pass a motion calling for an independent review of the loan charge, Ray McCann says that only HMRC can bring the multifaceted scandal to an end.
Dave Chaplin recently raised important issues around how individuals (whether they be subpostmasters or other taxpayers) are protected from overzealous government departments and agencies who, typically, have very deep pockets when it comes to pursuing what they see as wrongdoing.
Chaplin is not alone or wrong in describing the prosecution of subpostmasters as a scandal. With the loan charge and IR35 however it becomes more complex since, in my view, how we got here cannot simply be laid only at the door of HMRC. I have no problem describing the loan charge as a scandal – however, it is a multifaceted scandal.
Passed on the nod
The most radical tax legislation of modern times (perhaps ever) was passed with hardly any scrutiny by MPs who now claim that insufficient time was left to do so in 2017 due to debate time being curtailed in Parliament. It’s not the first tax provision to be passed on the nod and unless there is change it will not be the last. And since HMRC has some involvement in our lives from cradle to grave we should all be concerned about that.
Then there is the fact that over 50,000 individuals are caught by it with perhaps hundreds of thousands involved overall in loan schemes involving billions in tax and NIC. Without the various settlement opportunities offered by HMRC in the years leading up to 2016 the number caught would have been much greater. It is undeniable that among that number are many individuals (perhaps several thousand) who were in one way or another duped or scammed.
Giles Mooney, one of the UK’s most respected tax experts mentioned to me recently that a banker had grumbled to him that “he would have to sell one of his holiday homes to pay the loan charge.” Mooney’s experience mirrors mine, but I have also seen the luxury properties bought by employee benefit trusts (EBTs) in the Bahamas and other desirable locations for the exclusive use of employees/beneficiaries before soft loans became the benefit of choice and it’s anyone’s guess how many expensive London properties were funded by soft EBT loans.
Therein lies the difficulty for very many tax advisers – our experience is mainly at the wealthier end of these tax schemes. We don’t see, or at least not easily, those on low incomes who have been misled, scammed and defrauded. And we all knew that it was a matter of time before the “soft loan” gravy train was brought to an end.
Even 20 years ago there were few tax advisers who did not find the reluctance of the special commissioners to see the Dextra loans for what they were – loans so soft that if you had fallen from a tall building and landed on them you would have walked away unscathed. And for many advisers it is a challenge not to put all of those involved in the same bracket as individuals who knew full well that it was tax avoidance.
Again, as Mooney puts it, “I have huge sympathy for the people who were forced into it. I heard of some who were still given monthly ‘payslips’ with 20% tax deducted. It later transpired that the 20% was a commission and no tax had been taken. The commission takers had disappeared off the face of the earth but, thankfully for those affected, the Revenue were sympathetic and helped as much as they could. Even those who entered into schemes themselves have been given the chance to declare, settle and deal with the position. Many have chosen not to. My sympathy for them reduces with every day they don’t work with HMRC to resolve the problem.”
I understand Mooney’s final point but for very many of those involved the settlement terms offered by HMRC offered no real possibility of coming to terms that were in any way capable of being met. HMRC should have been more aware of the difficulty thousands would have in reaching a settlement and the determination to bring the schemes to a close by way of a radical legislative approach should have been matched by a radical approach to settlement. HMRC had the Morse Review foisted on it and the end result was a widening of the escape hatch and many of those who should have been caught were able to slip away, including, most likely, Mooney’s banker.
So if the loan charge is a scandal, added to the way that the loan charge was passed by a seemingly unsuspecting Parliament the following are also the case.
• It’s a scandal in that hundreds of thousands signed up to tax schemes happy to believe that being paid by way of a loan was something that HMRC would be content with and where a quick Google search would, even 20 years ago, have shown that HMRC had not gone away in trying to pursue tax and NIC.
• It’s a scandal that these schemes went on so long.
• It’s a scandal that even after 2010 some lawyers were happy to approve new schemes claiming to circumvent Part 7A or that Part 7A was ineffective against “self employed loan schemes”, while ignoring the tax code more broadly.
• It’s a scandal that ministers seem to have been so poorly advised by HMRC/HMT over how easily 50,000 individuals (becoming more angry by the day) could be persuaded to settle.
• And it’s a scandal that HMRC has allowed itself to be seen (with some justification) as callous and uncaring in the face of more and more evidence that its strategy was not working and was causing very significant harm.
So, Chaplin is right, a Taxpayer Bill of Rights, (we have a “Taxpayers’ Charter”), would help but many inside and outside of HMRC will say “What about responsibilities?” Some years ago, I met a very successful entrepreneur who had simply closed his mind to an outrageous tax scheme (inevitably promoted from offshore.) His huge capital gains liability magically disappeared and in truth the scheme was a con on every level. After resolving matters with HMRC (very narrowly avoiding a large penalty) he admitted that despite being very diligent in his business affairs he had simply closed his eyes, signed on the dotted line and paid the fee. Such behaviour is difficult to explain, and I suspect that today HMRC would be much more inclined to impose that penalty.
Only HMRC can bring the loan charge scandal to an end. Ever so slowly tax scheme promoters are being named and shamed, and as Mooney puts it: “Of course the sellers are also (in some ways even more) to blame. I firmly believe they should be held to account. And while laws are gradually catching up with the need to police and penalise agents, it is too little too late on the loan schemes.
“But this must never be allowed to happen again.”
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Ray McCann is a consultant to Joseph Hage Aaronson LLP and Charter Tax Consulting Ltd. He is a fellow of the CIOT and a member of the ATT and was CIOT president between 2018 and 2019 and a member of the CIOT Council until this year. He is a former HMRC inspector.