The ICAEW Tax Faculty has flagged-up the potential hardship this charge will cause in certain cases, and has provided suggestions as to how the draft law can be improved.
Finance Bill 2017-2019
The idea of imposing tax and NIC charges on the value of contractor and EBT loans (known as disguised remuneration), which remain outstanding at 5 April 2019, was raised in the 2016 Budget. The draft provisions to apply these charges formed part of the first Finance Bill 2017, but were withdrawn from that Bill before the General Election. A similar version of the draft law has been included as clauses 34 and 35 and schedules 11 and 12 of Finance Bill 2017-19, which is now being discussed in the Public Bill Committee in Parliament.
In August 2017, Andrew Robins outlined how individuals could avoid these tax charges on the loans they have taken, if they settled the disputed tax with HMRC. However, he concluded that many contractors would face ruin if they were forced to pay the tax charges based on the current draft law.
The ICAEW Tax Faculty has presented written evidence to Parliament on the draft proposals in Finance Bill 2017-19. The Institute supports the policy of countering tax avoidance, but makes the following points to MPs who are considering the charges on outstanding loans from disguised remuneration (DR) schemes.
People were misled
Workers such as nurses, teachers, IT workers, cleaners, etc, were often paid earnings at around national minimum wage with the balance via loan arrangements. Such individuals may even have been uneasy about receiving loans rather than pay in return for their services but, in a similar manner to the victims of pensions and payment protection insurance miss-selling, assumed that their employers or agencies who were putting them into the arrangements were acting within the law and accepted the advice that they were given. Those who had doubts may well have assumed that HMRC would step in to regularise the position before too long.
HMRC took too long to act
Some people who used the DR schemes knew exactly what they were doing and were deliberately avoiding tax: they deserve little or no sympathy. However, in all cases HMRC should have acted far sooner against these schemes.
The Rangers football case decided in the Supreme court has provided certainty that employees and contractors in DR loan schemes were avoiding tax. It is disappointing that it has taken nearly twenty years to for HMRC take decisive action to counter these schemes and those who perpetrated them.
ICAEW members report that HMRC are using unreasonable estimates to quantify loan balances subject to tax. Multiples of 6-8 times salary have been cited even when evidence suggests lower figures. Relying on estimates should be unnecessary for employees given that loan balances would have been reported to HMRC on forms P11D.
Introducing a charge on transactions entered into up to 20 years ago which potentially could result in taxpayers becoming insolvent, may not only leave the Government vulnerable to challenge under the human rights law, but may actually reduce the tax yield.
The ICAEW has the following recommendations for changes to be made in the draft law.
Cap the tax
To tax collected under this loan charge should broadly reflect the tax which would have been paid, had the loans been treated as earnings at the time. However, the law as drafted will bunch all the loans into a single year, so the taxpayer may pay 40% or 45% tax on the total value, when he would have paid 20% tax when the loans were provided.
An equitable solution is to cap the tax recovered under the loan charge at the amount of tax that would have been due had the loan constituted earnings for the tax year in which it was made, plus any interest that would have been charged on late paid tax on those earnings.
If it is not possible to calculate the tax cap accurately, the loans should be top-sliced over the number of years over which they were granted. The tax charge should be limited to tax chargeable on these sums plus interest on late paid tax that would have been due had the top-sliced loans been treated as earnings at the time.
Loans of £10,000, £20,000, £30,000 and £40,000 granted in four years. Perform top slicing as follows:
- Add the loans together: £100,000
- Divide by number of years: 4 = £25,000.
- Calculate the tax at marginal rates on figure above: £25,000 x 40%= £10,000
- Multiply the outcome by number of years: £10,000 x 4 = £40,000
- Calculate the amount representing interest on late paid tax for each tax year until the tax is settled.
Ability to pay
Making DR scheme users bankrupt will mean that little or no tax will be collected from these individuals, and bankruptcies have social impacts that draw on social security and NHS resources. HMRC is likely to collect more tax if it adopts, in appropriate cases, a sympathetic and flexible approach to resolving the taxpayers’ affairs, and allows time-to-pay arrangements that are substantially longer than normal.