Tax barrister throws the book at HMRC loan charge factsheet
A leading tax barrister has published a line-by-line takedown of the HMRC factsheet issued in the wake of the decision to review the effects of its 2019 loan charge secured by MPs.
Keith Gordon of Temple Tax Chambers took to Twitter on 17 January to respond to the tax authority’s claims that it needed to “give the facts” about its loan charge.
The loan charge rules are already law and are due to come into effect from April 2019, but earlier this month a cross-party group of MPs secured an amendment to the Finance Bill forcing the Treasury to review its effects.
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.
While Gordon felt that the review forced on HMRC by MPs should have prompted some “soul searching”, the tax authority instead issued a factsheet detailing how a typical tax avoidance loan scheme operates and containing phrases such as “tax avoidance takes money away from schools, hospitals and social care”, and “the loan charge rightly tackles avoidance and ensures people pay what they owe.”
Gordon decided to dissect the claims made in the factsheet line by line, and the following is an abridged version of his Twitter thread intertwined with the relevant lines from the HMRC factsheet.
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HMRC factsheet: “People who use these schemes are paid in loans, rather than a salary in the normal way, to avoid paying tax and NIC.”
Gordon: “The tax code allows employees to be paid in different ways – cash or benefits or both. They are all taxed differently according to the rules. So if you are paid wholly by loan, you pay tax under the rules for loans. And in the loan schemes I have recently seen, the workers did just that – they paid tax and National Insurance on the loans.”
HMRC: “Unlike normal loans, they aren’t repaid and no tax is deducted.”
Gordon: “Of course no tax is deducted. There is no provision in the 20,000-odd pages of UK legislation that requires tax to be deducted from a loan. But tax (and NI) is paid each year on the benefit of the loan … under the tax laws in place.”
HMRC: “This is clearly income and tax should be paid.”
Gordon: “Just saying ‘clearly’ does not make it true. If it is a loan, it should be taxed as a loan.”
HMRC: “HMRC does not approve these schemes and has always said they don’t work.”
Gordon: “HMRC does not have to approve arrangements. They do not even have to like them. If they don’t like them then they should have challenged them or changed the law to stop them gaining momentum.”
[On said schemes not working] “HMRC said nothing of the sort until 2016 (at least not publicly). But assuming that was indeed HMRC’s position – then why did they NOT challenge them?”
HMRC: “Users’ income on average was twice as much as the average UK taxpayer”
Gordon: “This is HMRC trying to play the politics of envy. Relying on averages is notoriously misleading. It allows HMRC to merge the corporate directors who knew what they were doing with contractors, many of whom were duped into using the schemes.”
HMRC: “65% work in business services: IT consultants, financial advisers, and management consultants. Around 3% work in medical services (doctors and nurses), teaching, social and community services sector.”
Gordon: “HMRC knows that everyone thinks those who work in medical services and teaching etc deserve sympathy. HMRC is relying on people thinking that those who work in business services do not deserve sympathy. HMRC is meant to treat all taxpayers equally.
“Even on HMRC’s numbers, that's 1,500 members of the caring sector being unfairly treated by the loan charge. And most of those would have been employed in the public sector (as would many of the 65% as well). Aren’t those payers also complicit in the avoidance?”
HMRC: “Fewer than 1% of users have an outstanding loan before 2003.”
Gordon: “DOTAS [Disclosure of tax avoidance schemes rules] was introduced in 2004. Presumably, that means that nearly 99% of the loans were subject to early notification to HMRC. So what happened?”
HMRC: “Around half of outstanding loans were made in the last seven years”
Gordon: “We know HMRC got their act together in about 2016. Even then, at that late stage, it would have been in time to assess half of all loans under their normal powers. If their figures are right.”
HMRC: “Tax avoidance takes money away from schools, hospitals and social care.”
Gordon: “Tax evasion takes far more money away from schools, hospitals and social care. Plus a lot of money is lost from these sectors by HMRC incompetence. This is a case in point. If HMRC had really wanted to stop these loan schemes, they should have made clear their position in 2003 or 2004, or even 2010.”
HMRC: “and ensures people pay what they owe”
Gordon: “No it does not. It simply imposes a new liability because HMRC missed the boat last time and because, under the law, the workers no longer owed the amounts HMRC would like them to have paid.”
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According to Gordon, the entire problem boils down to an issue he raised in evidence to the Treasury Sub-Committee – the dehumanisation of taxpayers.
“From HMRC’s perspective, there were some aggressive avoidance arrangements involving company directors obtaining company funds in a tax-favourable way. Whether rightly or wrongly, HMRC has little sympathy with such schemes,” he said.
“In parallel, many contractors were persuaded to participate in similar arrangements. However, HMRC had already stigmatised the arrangements as egregious avoidance and in their mind condemned all participants as immoral. Therefore, they're just blind to the shades of culpability.
“The Loan Charge is a powerful weapon which might be justifiable to deal with the former situation (although I still have my doubts). However, as HMRC have dehumanised ALL participants they just cannot see why it is so unfair to apply it to contractors.
“Suicide, divorce and bankruptcy are all human tragedies. But HMRC will not be moved because, in their eyes, everyone affected has ceased entitled to be treated as a real person.”