A cross-party group of MPs has secured an amendment to the Finance Bill forcing the Treasury to review the effects of its 2019 loan charge measure.
The government was yesterday forced to rethink its controversial loan charge tax avoidance plan after MPs backed an amendment to the Finance Bill tabled by former Liberal Democrat environment secretary Ed Davey.
Amendment NC26 requires the Chancellor to review the effects of the loan charge legislation and provide the House of Commons with a report by 30 March 2019, and was tabled after a sustained campaign from opponents of the charge who claimed it would unfairly punish, and in some cases bankrupt, tens of thousands of contractors and agency workers who had used disguised remuneration schemes.
Initially proposed in the 2016 Budget, the tax charge on certain loans to contractors and employees – often labelled disguised remuneration schemes – has attracted a huge amount of controversy. This is due to its retrospective nature, which allows HMRC to examine arrangements going back almost 20 years, and the fact that those found to be using such schemes could face a charge for those 20 years of income tax in a single tax year (with one taxpayer allegedly given just 18 days to pay a tax demand of £153,000).
Charge still due to come into effect
The review will not in itself bring an end to the loan charge uncertainty for those affected by the measure.
Loan charge rules are already law, contained in F(No 2)A 2017, Sch 11 (with supplementary changes in FA 2018, Sch 1). Responding to the amendment, Financial Secretary to the Treasury Mel Stride commented that the government was happy to review the effects of the loan charge, but insisted that such ‘disguised remuneration’ schemes were “gross aggressive tax avoidance”, and that the outstanding tax remained due.
In a letter to all MPs prior to the amendment Stride claimed that the legislation itself was not retrospective.
“The schemes never worked under the law that existed at the time they were used,” said the letter. “A number of court successes, including in the Supreme Court, support the view that the payments to the individuals were always taxable as income. Even without the loan charge, HMRC would be legally obliged to pursue the tax due.”
An HMRC spokesperson confirmed that the charge would still come into effect on 5 April 2019. “The amendment does not change the legislation but will ensure that a review of the impact of the loan charge is published before that date,” said the spokesperson.
“We want to do all we can to make it simple for people to get out of these schemes and we’re here to help. Anybody who is worried about being able to pay what they owe should get in touch with HMRC as soon as possible on 03000 530 435”.
Impacts of the charge
In a policy paper published in 2017, the tax authority stated that it expects the measure to affect up to 50,000 individuals and the Revenue has previously stated that it expects to protect around £3.2bn in tax by tackling such avoidance schemes.
While HMRC’s policy paper gave an estimate of the number of taxpayers potentially affected by the charge and the charge’s impact on Exchequer tax receipts, a recent Freedom of Information request has highlighted that no work has been done around how many individuals are anticipated to become insolvent, either at the time of writing the Policy Paper or using up-to-date information.
The policy paper says that the measure “is not expected to have a material impact on family formation, stability or breakdown”.
However, according to campaigners, representative bodies and politicians, this has unfortunately not proved the case. In 2017 the ICAEW flagged up the potential hardship the charge will cause in certain cases, while a House of Lords committee charged with investigating the loan charge was “inundated” with letters about the impact the scheme was having, some of which he labelled “heart-breaking”.
In an article for AccountingWEB in 2017, RSM’s Andrew Robins also flagged up HMRC’s unwillingness to change its settlement terms, even where the tax at stake is enough to result in financial ruin for the taxpayer. HMRC’s attitude is heavily influenced by its view that loan arrangements are abusive tax avoidance, and cracking down hard on affected taxpayers is a way to send a signal discouraging anyone from undertaking similar ‘tax planning’ in future.
‘Hope to thousands of innocent people’
While the decision does not mark the end of the loan charge, it has marked a shift in government thinking on the measure. Following the passing of the amendment, Davey tweeted that he felt it was “an outrageous attempt at retrospective tax” and that that decision “gives hope to thousands of innocent people”.
Loan Charge: delighted to report I have just led a X-party amendment & forced Ministers to backdown to uphold fairness & rule of law!
— Edward Davey (@EdwardJDavey) January 8, 2019
Commenting on the amendment, Steve Packham from the Loan Charge Action Group told AccountingWEB that campaigners were pleased the government has been forced into reviewing the loan charge and were extremely grateful to Sir Ed Davey and the MPs from all parties who secured the review.
However, Packham expressed concern that the Treasury would use the review to conduct a “meaningless whitewash”.
“[The Treasury] and HMRC have spent months misleading MPs with cynical propaganda and the Minister’s speech was ungracious and factually wrong,” said Packham. “There are no court judgements that justify the loan charge on employees, as he well knows, and the arrangements were known to HMRC who accepted people’s tax returns and did nothing.
“With families facing bankruptcy and homelessness, it is time ministers finally listened and accept that this policy is deeply flawed, profoundly unfair and will cost lives. If they fail to listen in the face of such overwhelming opposition in Parliament, they will be knowingly allowing this to happen which is frankly unforgivable.”
Another high-profile opponent of the measure is Lord Forsyth, Chairman of the House of Lords Economic Affairs Committee, who called the loan charge “unfair” and “pernicious” in a recent interview with AccountingWEB following the release of a report on HMRC powers.
Lord Forsyth welcomed the review but cautioned that it must result in meaningful action.
“We urge the government to listen to the people who contributed to our December report,” said Lord Forsyth. “They face crippling bills from HMRC. These people do not earn high incomes and entered these schemes under false assurances that they were legitimate.
“The government should remove all those who told HMRC they were participating in these schemes from the charge, and they should set up a dedicated helpline.”