While the news was welcomed by campaigners, details of the review are scant leaving an estimated 50,000 users of loan-based avoidance schemes in the dark. Meanwhile, a leading tax expert has branded the saga “a salutary lesson on how not to enact new tax legislation”.
In a short statement at the dispatch box yesterday, the embattled Prime Minister told the House that the loan charge was something his own constituents had raised and was a “very difficult issue”. Johnson then declared that he would undertake a “thoroughgoing review of the matter”.
As with much of Parliament’s business of late, details of the review are somewhat lacking. A Treasury spokesperson told AccountingWEB: “As the PM has announced, the government will undertake a thorough review of the loan charge and will set out further details in due course.”
The statement followed a large demonstration outside Parliament from loan charge protesters, who also held a candlelit vigil for two individuals who had reportedly taken their own lives after facing the charge.
Urgent clarification needed
Inside Parliament, the All-Party Parliamentary Loan Charge Group (APPLCG), a cross-party group of MPs formed to investigate constituents’ concerns about the charge, welcomed the news.
However, in a letter to the Prime Minister shortly after his statement, the group stated that Johnson needed to act urgently to clarify a number of key issues surrounding the contentious measure.
Among the group’s chief concerns was that Johnson had not clarified if the review was to be independent – something he had previously committed to while campaigning to become Prime Minister back in June.
The group, led by former environment secretary Ed Davey, also called for the immediate suspension of all settlements and APNs associated with the charge until the review had been enacted.
Back in January this year the APPLCG secured an amendment to the Finance Bill forcing the Treasury to review the effects of its 2019 loan charge measure.
However, when the Treasury published its report in March its reiteration of the government’s previous position was described by the All-Party Parliamentary Group as a "whitewash".
Revisit the legislation
Commenting on the review announcement, George Bull, senior tax partner at RSM stated that he found the timing “bizarre” considering that the 31 August deadline for the finalisation of voluntary settlements has already passed and two further deadlines are imminent.
By 30 September, loans affected by the loan charge must be disclosed via the online portal, and by 31 January 2020, these must be all be disclosed as part of the tax return.
“Whatever the outcome of this new review, if it means MPs will need to revisit the legislation, then it is imperative that they do so this time with a complete understanding of the consequences of their decisions,” said Bull. “This whole sorry saga has been a salutary lesson on how not to enact new tax legislation.”
What is the loan charge and why is it so controversial?
The loan charge was created to collect tax in respect of the numerous loan-instead-of-salary schemes (known as disguised remuneration) that appeared following the government’s clampdown on contractors in the early 2000s.
Workers were paid via loans to avoid tax and NI contributions, and although they paid tax on the benefit of having an interest-free loan, in many cases they did not expect to ever repay the loans. HMRC claims that such arrangements could never avoid tax, although specific rules against disguised remuneration did not come into effect until December 2010.
The Revenue’s solution to collect tax on the huge number of disguised remuneration loans in existence was the loan charge, which adds together all outstanding loans, over the course of up to 20 years, and taxes them as income in one year. Those hit by the loan charge originally had to pay by the end of January 2020, but HMRC claims it has a range of solutions for those affected to settle and spread the cost with them.
Around 50,000 individuals with a range of backgrounds will be affected by the loan charge, and accounting institutes and bodies, along with MPs and peers, have condemned the government for failing to properly assess its impact.
It has long been feared that the loan charge could lead to mass bankruptcies, and there have been reports of suicides directly linked to the charge.
A separate House of Lords inquiry conducted last year labelled the charge “unfair” and “pernicious”, and found that those affected included low-paid NHS and social workers who claim to have unaware they were even part of such schemes, having been forced to operate through umbrella companies by their employment agencies.
The charge has also come under fire for its retrospective nature, although the Treasury has taken the view that it is not technically retrospective.