Lords call for urgent loan charge review

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A Lords committee has urged HMRC to urgently review all cases for the controversial loan charge where the only remaining consideration is the individual’s ability to pay, as part of a wide-ranging report into HMRC powers.

Published today, the report from the Economic Affairs Committee entitled ‘The Powers of HMRC: Treating Taxpayers Fairly’ concluded that the powers given to HMRC are “undermining the rule of law and access to justice in the current approach to tackling tax avoidance”, with chairman of the committee Lord Forsyth commenting that new powers given to HMRC by the government “disproportionately affect unrepresented and lower income taxpayers”.

The committee called for HMRC’s powers to be reviewed, increased oversight of the tax department, and recommended widening the remit and authority of the Adjudicator’s Office, with HMRC obliged to follow its recommendations.

Speaking to AccountingWEB ahead of the release of the report Lord Forsyth reserved particular criticism for the 2019 loan charge, which he labelled “unfair” and “pernicious”. He went on to argue that the retrospective nature of the charge was “not acceptable”.

The committee also expressed concern about new measures in the 2019 Finance Bill which would extend HMRC’s powers further, prolonging the time limits for assessing offshore matters and placing an “unreasonable burden” on a disproportionate number of taxpayers.

Balance of power tipped ‘too far’ in favour of HMRC

Commenting on the report Lord Forsyth said that while HMRC was “right to tackle tax evasion and aggressive tax avoidance, a careful balance must be struck between clamping down and treating taxpayers fairly.

“Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer should expect,” he continued.

“We need to work together to build new principles for the tax system, taking a tough approach to tax avoidance while treating taxpayers fairly. We recommend a new review of HMRC powers, and an independent review to consider new oversight arrangements for HMRC.”

Responding to the Lords report a government spokesperson told AccountingWEB: “We’ve taken unprecedented action to crack down on avoidance and evasion, making sure people pay their fair share of tax and securing funding for our vital public services.

“Parliament has given HMRC powers it needs to tackle businesses and individuals who do not pay their fair share, and it uses them responsibly and subject to appropriate checks and balances.”

Loan charge

Initially proposed in the 2016 Budget, the tax charge on certain loans to contractors and employees has attracted a huge amount of comment and controversy, partially due to its retrospective nature which allows HMRC to examine arrangements going back almost 20 years.

Lord Forsyth told AccountingWEB that the committee had been “inundated” with letters about the impact the scheme was having, some of which he labelled “heart-breaking”.

“These schemes were being promoted by agencies saying that the Revenue accepted them and which had QC’s opinions,” said Lord Forsyth. “I don’t think you can expect social, health or IT workers who are not tax experts to understand. If they’re asked by their employer to do something and are told that the Revenue is OK with them then I think it’s understandable why they might have gone along with them.”

Lord Forsyth said until the Rangers case verdict in July 2017 and the introduction of the loan charge the Revenue had been “supine and silent,” about such arrangements, and by their silence gave tacit approval to such schemes.

“We took evidence from the Revenue and asked them why they had not done more to stop these things being promoted,” he said, “and the only thing they were able to say was that they had written to the advertising standards authority. We saw very little evidence that they’d gone after the people who were promoting these schemes.”

The committee recommended that HMRC urgently review all loan charge cases where the only remaining consideration is the individual's ability to pay, and establish a dedicated helpline to give advice and support to those affected by the loan charge.

Proposed new powers

Looking forward, the committee also expressed misgivings about two new powers in the current Finance Bill that it regarded as ‘disproportionate’.

The first measure triples HMRC’s normal time limits to 12 years for offshore matters. “During the course of the inquiry we discovered that ‘offshore matters’ includes owning shares in a US-quoted company or having a second home aboard,” said Lord Forsyth. “That will net a very large number of taxpayers, who if this goes through are expected to keep records going back 12 years.”

The committee could see no justification in the evidence it received on the offshore time limits, and recommended the government withdraw the Finance Bill clauses 2019 causes (79 and 80).

The other measure under the Lord’s microscope allows HMRC to access information on taxpayer bank accounts without the oversight of a tax tribunal. The committee could not see why this was necessary. Giving evidence HMRC told the committee that having to seek permission from the tax tribunal causes delay, but Lord Forsyth stated this that was a “fundamental right of taxpayers which was being traduced”.

The committee recommended that the government withdraw its proposal to remove oversight of the tax tribunal from HMRC access to information about taxpayers from third parties, for which consultation closed in October.

Don’t hide the Stride

Lord Forsyth made it clear that the committee was not directing its criticism at HMRC, who were carrying out the law, but the government for having provided these powers without the proper balance, which has resulted in gross unfairness to people.

The committee was “particularly outraged” by the refusal of Mel Stride, the minister responsible for HMRC, to appear before the committee, despite being asked on three separate occasions.

When the committee took evidence from HMRC officials about the loan charge, Lord Forsyth said they were “helpful and cooperative”, but made it quite clear that this was something Parliament had executed and was a matter for ministers.

Lord Forsyth said the loan charge legislation was passed without proper scrutiny. “There were three speeches made and it was nodded through,” he commented. “None of the consequences and real hardships caused were properly considered. Since then there’s been an early-day motion through the House of Commons signed by more than 100 people, and we therefore felt that the minister for whom HMRC is accountable ought to have to come to the committee.

“It’s led us to the conclusion that there needs to be a far stronger system of accountability for HMRC and there are recommendations in the report along these lines.”

Increased scrutiny

In the committee’s overall view, it is time to have another look at HMRC’s powers, revisit some of its core principles and establish some kind of independent scrutiny. It made several key recommendations including:

  • The government should consider widening the role of HMRC’s Adjudicator, or increasing HMRC obligations to respond to and act on Adjudicator recommendations.
  • The government should legislate to give the First-tier Tribunal (Tax) the power to conduct judicial reviews.
  • The Treasury should assess whether HMRC is adequately resourced to fulfil its charter obligations in the next spending review.

This was the second of two reports into the draft Finance Bill. The first on progress on the Making Tax Digital programme was published last month.

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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04th Dec 2018 11:08

Well said Lord Forsyth. I couldn't agree more!

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By gordo
04th Dec 2018 12:09

Indeed. It is a hard hitting report critical of the powers given to HMRC, the lack of oversight and there is particular criticism of the 2019 Loan Charge where it says:

76.The loan charge is, however, retrospective in its effect. Parliament has laid down time limits for tax matters of four, six and 20 years which give certainty to taxpayers about their affairs. It undermines this framework to artificially trigger a future charge.
77.In its retrospective effect, and its failure to pursue taxpayers proportionately to their circumstances, HMRC’s approach to the loan charge diverges substantially from the principles in the Powers Review.
78.We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been “closed”.
79.We were disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy, where individuals clearly have no assets to settle liabilities. Whether these threats were explicit or perceived, they have caused considerable anguish for a number of individuals.

HMRC response so far has been - that's what we were told to do.

Will the (desperate) Government pay it any attention?

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04th Dec 2018 15:39

There was something a little disingenuous in the BBC's article on this - though I don't know if that is due to the Beeb or if they are quoting from the report.

The comment was about a public sector worker who had been told to come back and work under a limited - and now owes loads of tax under the loan charge.

A little disingenuous to leave out the bit in between about her entering into a deceitful scheme aimed at avoiding income tax and NIC, signing over 90% of her pay in return for no consideration, then borrowing it back as sham loans with no ability or intent to repay them.....

The above is why she now owes the tax - the tax that was really always due - not the act of dressing up her employment as running a business. That's another matter altogether......

When will the lies and the deceit stop?

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to AnnAccountant
04th Dec 2018 16:43

You would be far, far better suited working for HMRC than taxpayers I think!

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to Justin Bryant
04th Dec 2018 17:42

By working for HMRC, are you not also working for the taxpayers?

It just so happens that by working for HMRC, you are looking after taxpayers as a collective group, whereas we as advisers look after the individual.

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to Lone_Wolf
04th Dec 2018 18:38

Speak for yourself but I am not a wolf in sheep's clothing (or just a wolf for that matter)!

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By gordo
to AnnAccountant
04th Dec 2018 18:33

Did you bother to read the carefully considered report prepared by their Lordships having considered all of the evidence laid before them and taking cognisance of the law as laid down by Parliament, or are you just going to lord over it demanding that people be taxed based on how you feel.

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to AnnAccountant
05th Dec 2018 12:56

I agree with you. Never promoted these things. I just saw it as a mess about to blow up in someones face and I didn't want it to be mine.

I flipped the coin... guess I was lucky...

Although... the more I practice the luckier I get ;)

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By djn
to AnnAccountant
05th Dec 2018 16:26

AnnAccountant wrote:

There was something a little disingenuous in the BBC's article on this - though I don't know if that is due to the Beeb or if they are quoting from the report.

The comment was about a public sector worker who had been told to come back and work under a limited - and now owes loads of tax under the loan charge.

A little disingenuous to leave out the bit in between about her entering into a deceitful scheme aimed at avoiding income tax and NIC, signing over 90% of her pay in return for no consideration, then borrowing it back as sham loans with no ability or intent to repay them.....

The above is why she now owes the tax - the tax that was really always due - not the act of dressing up her employment as running a business. That's another matter altogether......

When will the lies and the deceit stop?


I agree with this. Even though they may not have understand the small technical details they knew they were paying no tax and having lots of their income in loans.
They were told the risks bit took them anyway.
Harsh but they do owe the tax but I doubt they saved any of it.
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04th Dec 2018 19:02

Spoke to someone last night who works under an 'umbrella company' loan scheme and 'thought' he didn't pay enough tax (on £450 a day X 5 days a week per year). He didn't say how much tax he did pay but I guess it wasn't much.. In those circumstances I'm (and I can't believe I'm saying this) with HMRC.
I told him every such scheme has, in the past been defeated and he should expect a large tax bill soon.....
None of this would happen if our tax and NI systems were not so obscure.
As for 'social, health or IT workers' not understanding -they were quick enough to take up these schemes, weren't they?

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05th Dec 2018 11:59

These schemes are still being peddled to unsuspecting contractors particularly to people new into contracting. That is were the clamp down should start. A friend who had lost her PAYE job had started to sign up with agencies. One of these agencies had passed her details to a company who was promoting one of these loan schemes. They gave her the hard sell and she contacted me for my opinion because paying no tax seemed to good to be true. The company had told her it was all approved by HMRC and quoted the registration number from HMRC. I sent her the info about loan schemes and pointed out HMRC would be after her for tax and NI plus she would have to pay the loan companies fees. Happily she declined to have anything to do with that agency and the company selling the loan scheme.

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By Krusty
05th Dec 2018 11:08

The use of case studies of social workers and other public sector staff such as nurses who used these schemes makes me laugh. This is obviously to try and gain sympathy from the public by presenting them as people doing important work for society who are completely innocent in the matter.

They are being paid by taxation which they are aggressively avoiding. They're probably the ones complaining about cuts to services in their work due to lack of funding as well!

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05th Dec 2018 11:32

As someone who has been against umbrella companies loan schemes and other totally artificial constructs (I'm all in favour of sensible tax planning) I think those involved should pay back the tax they evaded. If this causes them financial hardship then they should bear it- after all, they were happy enough not to pay the tax that would have been spent on the NHS, etc and reap the benefits.

Affordability shouldn't come into it. Reap what you sow. Now if only they could pass on some of that pain to the promoters of such schemes and people who raked in commission pushing them...

I've had several clients tempted by such schemes over the years, all of whom after seeking my advice avoided them. Some have now thanked me for quite literally saving their houses!

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By tedbuck
05th Dec 2018 11:40

I think Ian has it right. It is difficult to imagine all these poor people being innocently unaware that evading tax which everyone else pays might not be entirely OK.

The other thing that irks me is that very few people realise that when these people go into these schemes it is the taxpayers who are paying for it. So the massively overpaid footballers who avoid tax are leaving their tax to be paid by their supporters who are considerably less able to afford to pay. So for once I think it is more power to HMRC's elbow and I don't say that very often.

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By gordo
05th Dec 2018 13:31

I can't agree with Ian because nobody has been accused of tax evasion (currently).

What the Lords have said is:

75. Disguised remuneration schemes are an example of unacceptable tax avoidance that HMRC is right to pursue. All individuals using these schemes must accept some degree of culpability for placing an unfair burden on other taxpayers.

76. The loan charge is, however, retrospective in its effect. Parliament has laid down time limits for tax matters of four, six and 20 years which give certainty to taxpayers about their affairs. It undermines this framework to artificially trigger a future charge.

77. In its retrospective effect, and its failure to pursue taxpayers proportionately to their circumstances, HMRC’s approach to the loan charge diverges substantially from the principles in the Powers Review.

78. We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been “closed”.

79. We were disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy, where individuals clearly have no assets to settle liabilities. Whether these threats were explicit or perceived, they have caused considerable anguish for a number of individuals.

The report did also say:

58. There is some evidence 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—an introduction from the Financial Secretary to the Treasury, a response from the Opposition, and a further response from the Minister. Concerns about retrospection and the impact on individuals were briefly raised by the Opposition, but not followed up by further debate.

(actually the Financial Secretary to the Treasury is on record congratulating the committee for completing the bill in record time)

Some of the witness submissions are also worth reading;

As editor-in-chief of XxxXxx.com we were recently contacted by the HMRC press office to consider placing a guide regarding the April 2019 Loan Charge on our website, as they sought to reach contractors. After agreeing to consider the copy, they sent something over which we ran past two independent tax experts, one of whom was an ex-HMRC tax inspector. We were informed it was factually incorrect and appeared to be designed to mislead in matters of law. So, we rejected the copy and asked HMRC if we could set up an interview to discuss in more detail the matters relating to the subject. We did not hear from them. We are also aware that another website for the contracting industry was also approached, and also rejected the information supplied by HMRC.

(HMRC reported Promotors to the ASA for misleading advertising!)

Lord Forsyth of Drumlean, Chairman of the House of Lords Economic Affairs Committee is quoted as saying “"Since 2012, perhaps due to reduced resources, HMRC has been granted some broad, disproportionate powers without effective taxpayer safeguards. High penalties, designed to deter some taxpayers from continuing appeals against tax liabilities, are a tax on justice.“

For the record I am not comfortable with the deliberate focus on the minority who may not have known that they were getting involved in a tax avoidance scheme, but I do think this is more about:

-access to justice;
-the rather important rule of law; and
the matter being "retrospective in its effect" despite all the protestations that it isn't.

I also note that last year acccording to HMRC tax gap report - avoidance was estimated at £1.7bn; per the Government Accounts the deficit for the year, once done on an accruals basis rather than a receipts and payments basis, was £418bn and the increase for one year in the public sector pension liabilities was £360bn. So the idea of HMRC claiming that there is a need to abandon the principles of our tax system by overriding all the time limit protections put down by Parliament itself, by backdating (in its effect) a new law, because these people are depriving services of essential taxes, is a little bit misleading or at least it's not giving the whole picture. Now I don't know if that's evading the facts or avoidance, but the truth is certainly being disguised.

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05th Dec 2018 22:28

I do have sympathy for people that are caught up in this and are facing ruin, especially modestly paid healthcare workers etc but that sympathy only goes so far.

How many such contractors, when applying for mortgages and declaring their liabilities and outgoings, have ever put on their application to the mortgage company that they had a big loan outstanding to a contractor loan trust? Absolutely none of them - so this is proof that either (i) they knew full well that these 'loans' were never repayable and so were complicit in the sham or (ii) they have significantly understated their liabilities and so committed mortgage fraud.

Even to this day, despite the publicity, these contractor loan schemes are still being peddled, and I regularly have clients asking me about them, determined to believe the snake oil salesman. We need people to be made examples of so that we can tell clients in no uncertain terms that is what will happen to them if they get involved in this.

One thing the Government could very easily do to stamp out contractor loans and indeed aggressive tax avoidance generally, is to make the scheme managers, promoters, introducers, agencies, complicit accountants and QC's all jointly and severally liable for any tax lost. That will focus minds...

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06th Dec 2018 09:18

I am not about to defend those who avoided tax as that will simply cloud the main issues here. We also have to put aside the moral issues involved as tax law is tax law and not a moral code. There are fundamental problems we face with HMRC (and the Govermnet) and how they act now and in the future. They have to be put in the context of this case to illustrate the problem.

Whilst HMRC have argued that loans were always taxable there is the case of Dextra in 2002 which clearly said they were not and more recently the first and upper tribunals in the rangers case said the same thing. Those hearings were in 2012 and 2014. Therefore whilst HMRC were saying what they were saying the courts and tax tribunals were sayibng something else. Eventually the Supreme Court said loans were taxable - not because of what the law said but what Parliament intended. That is where the game changed entirely.

We now, when advising our clients on ANY taxation matter have to warn them that we know what the law says but we cannot guarantee that HMRC will argue that the law is not what Parliament intended.

Where there were such legal precedents concerning the law surrounding the loans it is totally innapropriate to go back 20 years once a court case was decided in HMRC favour.

Additionally the new laws surrounding APN's and Follower Notices have no right of appeal.

Once the door has been opened in this way and no one does anything about it will we npw see future laws on routine tax matters framed in such a way i.e. no appeal procedures.

Moving on to the responses is the contributor who feels that an HMRC employee is helping and assisting a number of taxpayers. Does this person have an office on Mars perhaps and therefore not have to dela with HMRC in the UK. Their "mission" has been changed from collecting the "correct" amount of tax to collecting the "maximum" amount of tax. I have never met one officla from HMRC whois interested in helping any taxpayer.

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06th Dec 2018 09:18

I am not about to defend those who avoided tax as that will simply cloud the main issues here. We also have to put aside the moral issues involved as tax law is tax law and not a moral code. There are fundamental problems we face with HMRC (and the Govermnet) and how they act now and in the future. They have to be put in the context of this case to illustrate the problem.

Whilst HMRC have argued that loans were always taxable there is the case of Dextra in 2002 which clearly said they were not and more recently the first and upper tribunals in the rangers case said the same thing. Those hearings were in 2012 and 2014. Therefore whilst HMRC were saying what they were saying the courts and tax tribunals were sayibng something else. Eventually the Supreme Court said loans were taxable - not because of what the law said but what Parliament intended. That is where the game changed entirely.

We now, when advising our clients on ANY taxation matter have to warn them that we know what the law says but we cannot guarantee that HMRC will argue that the law is not what Parliament intended.

Where there were such legal precedents concerning the law surrounding the loans it is totally innapropriate to go back 20 years once a court case was decided in HMRC favour.

Additionally the new laws surrounding APN's and Follower Notices have no right of appeal.

Once the door has been opened in this way and no one does anything about it will we npw see future laws on routine tax matters framed in such a way i.e. no appeal procedures.

Moving on to the responses is the contributor who feels that an HMRC employee is helping and assisting a number of taxpayers. Does this person have an office on Mars perhaps and therefore not have to dela with HMRC in the UK. Their "mission" has been changed from collecting the "correct" amount of tax to collecting the "maximum" amount of tax. I have never met one officla from HMRC whois interested in helping any taxpayer.

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to Trethi Teg
09th Dec 2018 08:23

APN's and FN's have as you say no right of appeal, however if you (ie. the settlor company) choose not to pay, then in all likelihood HMRC would refrain from choosing a winding up option unless 110% certain of their position and certain of substantial recovery with no future repercussions, but rather prefer to issue a penalty and interest notice, which I understand does have a right of appeal and which surely would then require the tribunal to assess the APN and FN in first instance to establish the facts around the penalty/interest notice. A rediculous state of affairs but hardly surprising.

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06th Dec 2018 14:27

It wouldn't surprise me if half the lords committee have been or are in schemes that this relates to.

I can only imagine the 'heartbreaking' stories....you know the ones....if I have to repay the loan i will lose my house! (whilst forgetting to mention that they have literally paid no tax for the past 10 years....althought they probably mention the large fees they have paid to scheme providers)

Retrospective in this situation is a matter of opinion....what repaying a loan you always 'intended' to repay....

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08th Dec 2018 08:59

I believe the biggest issue here is, if it's so easy for HMRC and the Government to plug a loophole by introducing a loan charge in the FA2017 then why on earth did they not do this in 2000 but wait some 17 years to plug it and then introduce retrospective legislation to cripple those that took advantage of a loophole. It's the Government's fault and HMRC's fault not the tax payer, and you can hardly blame anyone for taking advantage in order to reduce their tax bill. Are we really suggesting that when a hard working person who feels he/she pays more than is necessary to wasteful governments walks in for tax advice and is told if you choose option A you pay a wadge of money to the tax office but option B allows you to pay nothing and that's according to the law but HMRC feel differently, that taxpayer would choose option A? . In all seriousness what does anyone expect that person to do, or are we suggesting morally we all dip our hands in our pockets each week and pay all we can to keep the nation going ahead of food on the table for our family? HMRC have screwed up for some 17 years, they have failed to win court case after court case and continued to let the matter drift now they want retrospective legislation and new powers to chase the individual where companies can't pay to get them off the hook. By all means introduce a loan charge to stop a loophole but don't do it retrospectively.

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08th Dec 2018 09:04

And one more thing, if it needs courts to interpret what is the Government's /HMRC's intention then it's pretty poorly worded legislation in the first place. Bring back common English language and we will all be far better off. Save on a lot of legal bills !!

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10th Dec 2018 14:55

I am sure we would all love to pay no/little tax due to our views of how each government spends the money...but then I adhere to this because it is for the greater good....NHS/policing/benefits system etc....but apparently we are talking of people who are struggling to put food on the table of their families.....

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