ICAEW slam contractors’ loan charge

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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 The draft provisions to apply these charges formed part of the first Finance Bill 2017, but were withdrawn from that Bill before the General Election.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.   

Written evidence

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.

Unreasonable estimates

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.

Human rights

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.

Recommendations

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.

Top-slicing

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.

Example

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.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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By gordo
30th Oct 2017 07:48

What happened to the rule of law in this Country. ICAEW replied to the earlier consultation on this matter saying that the proposal of retrospective taxation contravene generally accepted notions of fairness and broke the constitutional convention against retrospective legislation, imposing a tax charge where individuals previously had certainty that none was due.

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30th Oct 2017 09:13

This is what happens when the ICAEW, CIoT etc. do not stand up to other unjust retrospective tax changes; you get the predictable slippery slope. Had they taken the opportunity to challenge those other cases and kicked up a fuss then (and they had every opportunity to do so) I doubt we would have this other nasty retrospective tax charge.

Incidentally, the reason they gave for not challenging those other cases was coz they did not want to give the impression to anyone that they were supporting tax avoidance. So what has changed in this case?

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30th Oct 2017 09:36

Quote:
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 warnings for the tax year in which it was made

Shouldn't that be "Earnings"?

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to SteLacca
30th Oct 2017 14:43

I've corrected - it should say "earnings"

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30th Oct 2017 10:13

Agree entirely with previous views. The law now appears to be there for use by the authorities when it suits them. No one wants to be seen to be providing any support for the rule of law when it comes to "avoidance" in case it damages them personally. This goes as far up as the Supreme Court.

It also seems that those putting forward ideas do not acknowledge (or perhaps understand) the difference between those that would have been "employed" if they hadn't entered into these arrangments and those who have used these arrangements for their own companies.

Those employed would have attracted both income tax and NI. This could have equated to 45% plus NI.

For those who had their own companies it is likely that they would have paid Corp Tax at 20% plus dividends at nil rate and then dividends at the higher rate. The remainder would heave been left in the company and extracted tax efficiently at a later stage. Additionally, if those with thoer own companies had not used loan arrangments they would have, very often, used pension contributions etc to mitigate tax. Therefore the loss to the Revenue for those with companies would be much less than 45% and well below those "innocent victims" who would have been employed in any case.

The loss certainly doesn't equate to the figure now being pursued of close to 60%.

I suspect however that those in the ICAEW etc are more interested in not upsetting the Establishment and thus ensuring that their "gongs" are protected.

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to Trethi Teg
30th Oct 2017 10:47

Yes indeed. For example, I don't know any tax lawyer (apart from Julian Ghosh QC & his junior) who agrees with the Rangers SC decision or who thinks it is internally self-consistent. It was pure Hodgewash.

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31st Oct 2017 13:01

You know the argument is lost when anyone starts claiming something will impact nurses, teachers and cleaners - ie trying to evoke sympathy by virtue of what somewhat does (in return for pay, I might add) rather than the actions that are relevant to the matter at hand.

In any case, were low paid cleaners really sold EBT schemes? To shelter what? Their use of their PA? Their entitlement to working tax credits?

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31st Oct 2017 16:13

you have to wonder how much these 'cleaners' and 'nurses' were earning for the provider to justify going after them.

I wonder if I can come to an arrangement where I don't pay any tax for the next 5 years and then have to repay it on a nothing down and nothing per month for the remaining term.

Perhaps ICAEW would have been better served warning its members of the absurdity of such contrived schemes and taken appropriate action against those benefiting from mis-selling them.

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