As part of his campaign to become Prime Minister Boris Johnson promised to review the loan charge, and when he got the job he followed through on this promise.
The loan charge lobbyists were told that this review would be independent, and indeed it will be led by the former head of the National Audit Office (NAO) Sir Aymas Morse. He is a well-respected figure who was formerly the global managing partner of PwC before he led the NAO for ten years, holding the government to account on its spending.
Terms of review
Morse will consider whether or not the loan charge is the right way to collect tax due from the use of disguised remuneration schemes (including contractors loans), and as such his review will be much wider than the first HMRC technical review. That review was branded a whitewash as it did little more than restate the technical operation of the law and didn’t examine its effects on individual taxpayers.
We don’t yet know the boundaries which Morse will work within for his review, but he is expected to report back to Sajid Javid by mid-November. This doesn’t provide much time to take statements from a wide range of witnesses including HMRC officers, Treasury officials, taxpayers, and tax advisers, and to weigh up all the evidence.
The imposition of the loan charge has been highly controversial and has arguably driven some people to suicide. HMRC and Treasury officials have been accused of manipulating facts in order to justify their actions in respect of the loan charge. Whilst lobby groups have been relentless in their campaigning, pursuing certain Treasury Ministers and anyone who doesn’t condemn the loan charge on twitter.
The Loan Charge All Party Parliamentary Group (APPG) has conducted its own inquiry into the loan charge which reviewed a large body of evidence collected from hundreds of affected taxpayers and from HMRC.
In response to the Morse review announcement the Loan Charge APPG has written to the Chancellor demanding that it must be genuinely independent of HMRC and the Treasury. Leading barrister Keith Gordon is also troubled that the review will be staffed by HMRC and HM Treasury civil servants, which could lead to a perceived conflict of interests given that HMRC and HM Treasury are likely to come in for a lot of criticism.
The APPG has also asked for all settlement activity (tax agreements with HMRC), enforcement and penalties to be suspended pending the outcome of the loan charge review and the implementation of the recommendations. However, that is not going to happen.
HMRC has made it clear that taxpayers who have agreed a settlement with HMRC and are paying the tax due by instalments should carry on making those payments. Those who provided information to HMRC before 5 April 2019, but have yet to reach a settlement can continue with the settlement process or wait for the outcome of the review.
Those who have decided not to pay tax on their disguised remuneration loans and are instead due to pay the loan charge need to provide information to HMRC about their outstanding loans by 30 September 2019.
A brief history
The loan charge was designed to encourage taxpayers to pay income tax, national insurance and interest which HMRC believes to be due on loans they received in years going back to 1999. HMRC refers to those loans as “disguised remuneration” on the basis that they were never designed to be repaid, and hence the loaned amount should be taxed as if it was salary paid in the year it was provided.
Many taxpayers did not agree with HMRC’s view of the loans, and if they did agree they believed that the employer should be liable for the tax and NIC on the loan, rather than the individual. Arguments ground though the courts and in some cases HMRC did not act quickly enough to challenge the tax treatment before tax years were closed to enquiries.
The loan charge was proposed in the 2016 Budget to close down all the arguments about disguised remuneration, one flavour of which is contractors’ loans. All taxpayers who had not agreed their tax liabilities in respect of disguised remuneration loans by 5 April 2019 would have to pay the loan charge imposed at that date.
The loan charge taxes all outstanding loans as if the amounts were received as salary in 2018/19. The professional accounting bodies, including ICAEW, raised strong objections to the draft law, pointing out that taxpayers would become insolvent. However, the law was passed after the 2017 general election in the second Finance Act for that year.