Tax barrister throws the book at HMRC loan charge factsheet

Stack Of Law Books In Front Of Scales Of Justice
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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.”

* * *

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.”

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have a story that might interest us or wish to comment on the site's coverage get in touch via the site's private message function or Twitter DM (@AWebTom)

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28th Jan 2019 11:04

I agree entirely with KG's obviously correct points. The more I think about it, the more I am convinced the 2019 loan charge is basically HMRC's revenge against BW EBT schemes (that HMRC should have tackled much, much earlier with anti-avoidance legislation and protective assessments etc. but didn't) and they simply did not care about the collateral damage (including potential double tax charges due to Rangers and of course people actually killing themselves - so HMRC have blood on their hands here).

In other words, this is a scandal upon a scandal with HMRC covering up their own incompetence with an indiscriminate weapon of mass financial destruction.

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to Justin Bryant
28th Jan 2019 16:02

I agree with the technical points, but the gist of these schemes was always "we are playing by the rules".

Now HMRC have changed the rules and the scheme users don't like it. Retrospective legislation is nothing new and HMRC and govt just got completely fed up with people using loan structures, so effectively played their trump card to get rid of them.

I have sympathy for anyone who was tricked into being paid through these structures and is now facing ruin, but from my first-hand experience, the people who willingly entered into them to avoid tax (and the firms which ran them) deserve no such sympathy.

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28th Jan 2019 12:12

As Keith correctly states, HMRC has known about these arrangements for many years and such arrangements were so widespread they could reasonably be believed to be acceptable as far as HMRC was concerned. There was no public statement denouncing them and on this basis if you are offered the opportunity to pay less tax and NI under what appeared to be accepted and widely used arrangements who would not take up the offer?

For HMRC to then retrospectively decide that the arrangements, which were widely known and used, were not acceptable is very unfair. Most taxpayers would have spent whatever their net income was several years ago, in many cases on their families, education, housing, etc and are now faced with financial hardship and potentially bankruptcy.

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to BryanS1958
28th Jan 2019 13:00

Wouldn't they have saved the money to pay the loan back one day?

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to Tom 7000
01st Feb 2019 08:14

Yes. If someone made me one of these dodgy sounding loand I would have said ah a loan - that means I have to pay it back some day. That is what a loan is rather than a gift.
Whilst I am not against the barrister correcting the HMRC spin the basic point that these people thought they could get away with these loan arrangements when other contractors were paying 40%+ tax was always going to be pie in the sky.

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to EnglishRose
02nd Feb 2019 07:55

If you read my last blog you will understand that you can't just say ALL loans were dodgy, to do so is crass ignorance. It's up to HMRC to prove case by case that the loan is dodgy not take a wholesale swipe to pull in to the pot all the honest and genuine loans out there. If the loan carries a repayment term, an interest term, a security term and a willingness by both transacting parties that the loan should be repaid then quite simply it's a LOAN NOT A GIFT. What HMRC have no right to do is to intervene in that legal contract to say the loan must be repaid in cash by 5/4/2019 and to impose penal taxes if it isn't.

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28th Jan 2019 12:24

Okay ten out of ten for effort by Keith, but his comments are all a bit one eyed and over simplistic.

Step back from it, who would actually prefer to be paid by loans.
But As per normal HMRC are well off the pace.

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to AndrewV12
28th Jan 2019 15:53

I think you've missed the main point here. HMRC doth protest too loudly with their fact sheet. If this was such grossly aggressive tax avoidance for more than the past 20 years per Mel Stride and since HMRC knew about it in the 1990s, why was nothing done since then, and not until around 15 years after Dawn Primarolo's warning statement in December 2004 in the link below?

https://publications.parliament.uk/pa/cm200506/cmstand/a/st060606/pm/606...

How can HMRC have it both ways (i.e. both escaping any charge of incompetence and being seen to do the right thing after all these years)? (Even worse, the retrospective effect goes beyond December 2004 to April 1999.)

Also, by comparison, HMRC have known about image rights (disguised remuneration) abuse for the past two decades, so why don't they apply a 20 year retrospective tax there?

https://www.itv.com/news/2019-01-21/record-number-of-footballers-under-i...

Is it because those particular taxpayers have mostly left the country?

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28th Jan 2019 13:01

Lets suppose they said ok you can do this and you log it in a big register and one day the earlier of the Trust ceasing or you dying you have to pay it all back with compound interest. Just like a mortgage.

because that's what would happen isn't it?

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to Tom 7000
28th Jan 2019 13:14

But that would not avoid the double tax charge due to Rangers would it?

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to Justin Bryant
28th Jan 2019 16:46

I know but I was saying - HMRC could have said that. And you would have to pay it all back one day. What a great way to get people to work for you for free. You could parcel the securities into packages and sell them on the bond market.

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28th Jan 2019 13:38

I presume these Schemes would have carried a DOTAS number?

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to tayloralastair
28th Jan 2019 17:15

Not necessarily as pre-2004 DoTAS grandfathering could have applied and what is the relevance of DoTAS anyway to this nasty retrospective tax charge? Apart from showing some ignorance, the above comment possibly shows that people have unfortunately swallowed HMRC's dog whistling tax avoidance propaganda here without thinking things through as KG has clearly done.

Also, if anything, DoTAS disclosure is yet another reason why HMRC are incompetent in not acting earlier here.

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to Justin Bryant
28th Jan 2019 18:49

That's an interesting remark. I've encountered a few dozen of these types of arrangements and viewed them all with the same jaundiced scepticism: Sensible advisers refer to actual case law and judgements before recommending clients engage in such a Scheme requiring a DOTAS, and as 95% of them fail it's a fool's errand. You are afterall waving a red flag to HMRC to come and get you.
Don't you find that the glossy brochures from the peddlers of these schemes always quote 'According to a QC's opinion' their scheme is compliant with UK taxlegislation? Nothing more specific than that and no mention that the so called QC was of sound mind or even a tax specialist. Oh, and they always offer a nice commission for clients pushed into these untried arrangements.
They smelt to high heaven and I wouldn't touch them with a barge pole.
There is more than an air of inevitability here. Anyone quoting a DOTAS on their tax return should not sleep too soundly & budget for the costs. I've always believed that and I will not engage with anyone who wishes to use these schemes, you get a bad name for your practice and there is guilt by association.
A senior inspector once confided that HMRC budget constraints meant that only a few selected DOTAS numbers were challenged in the courts each year. Seems like chickens are coming home to roost, and the advisors and peddlers should be held to account too. I hope for his sake the above respondent is not in that boat but don't come on these pages looking for support or sympathy.

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to tayloralastair
29th Jan 2019 09:58

That's not an interesting remark.

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to Justin Bryant
30th Jan 2019 20:23

Surprisingly it wasn't written for your interest or entertainment: If you need a friend I suggest you get a dog, but until then please stop filling these pages with sycophantic claptrap seeking affirmation for mistaken belief and perverse conclusion. The comments made by SculptureOfMan and AndrewV12 sum up the position succinctly and fairly.
Good luck with your future endeavours Justin, an OBN is on its way to you...

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to tayloralastair
30th Jan 2019 21:39

tayloralastair wrote:

95% of them fail

99% of statistics are made up, yours included.

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to bettybobbymeggie
31st Jan 2019 02:42

https://www.ftadviser.com/your-industry/2018/07/17/hmrc-victorious-in-23...

I think you're judging me by your own standards Betty

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to tayloralastair
31st Jan 2019 12:02

HMRC are notorious for publishing spurious claims about their tribunal prowess. Has it ever occurred to you HOW cases reach tribunal? HMRC pick which ones to fight and which ones to sit on, the latter in the hope they will get blanket legislation through parliament that allows them to circumvent due process (first with APRs, and now with the loan charge).

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By gordo
to bettybobbymeggie
31st Jan 2019 15:58

This is the department who claimed that their call waiting times had been reduced dramatically but it then transpired that they were not counting the time taken to go through the automated part of the call.

Also they rated calls where the caller hung up before the end of the process as 'successfully handled'. Their logic was that the person MUST have got the answer they needed from the automated process!

The cases that HMRC use to calculate their statistics for success are rather debatable, but even their own published table showed that they counted partial wins as a victory, in calculating their percentage success rate. Wait a minute, is a partial win not also a partial loss?

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28th Jan 2019 20:06

Well done KG
We need more to take a stand against HMRC who are abusing their powers and are attacking everything that they don’t ‘like’. We have tax legislation and case law that has built up over years and should be applied.

I don’t ‘like’ the way our tax revenues are spent but the rules in place mean that I have to pay taxes.

I don’t like having to do more and more of HMRC’s job for them than ever before or how they are increasingly uncooperative.

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By gordo
30th Jan 2019 22:44

Look if Mel Stride says “Never worked” & was “Always taxable” & HMRC claim “Very few closed years” & if “tax is due”
Then why not just tax these people
Why do HMRC need a new law?

Well the answer seems obvious.

I’m surprised that some on here are watching HMRC pursue a new law that overrules the protections written into the Taxes Act in an effort to tax something that the Courts have told them are not taxable (loans), yet still believe HMRC are successful by honest means. I’m also confused by the comment that the Tax Barristers expert view (on HMRC’s attempted misdirection) is overly simplistic.

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31st Jan 2019 16:06

As always I find myself in the middle ground albeit hounded as guilty by HMRC.

"Loans" are repayable period. The title'loan' speaks for itself.

BUT HMRC have demanded a 'loan' made between the trustee and any director/employee or connected party to any director/employee MUST be repaid in cash by 5/4/2019. Who the hell has given HMRC such power to intervene in properly constituted legal transactions between the trustee and the other party? Are HMRC to be given legal rights in every contract drafted up in this country or just ones they can use to add to the Government's coffers?

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31st Jan 2019 16:20

And just before anyone jumps down my throat as often happens on this blog, answer this first - why should a connected party having taken a loan from a trust, invested it wisely, pays the interest to the trust and has surplus profit from the investment be forced to liquidate the investments at what is probably the wrong time particularly given the devalued capital value as a direct cause of Brexit, to repay it by 5/4/2019?????? It's irrational, it's rediculous and it's immoral.

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31st Jan 2019 16:47

The mob on here who take the moral highground are, in my opinion, missing an important point that these schemes were promoted by fellow members of our profession. For us to turn around and tell them they are culpable is baseless in many situations. I appreciate that many users of these schemes went in with their eyes open and perhaps for them they deserve the loan charge. For others, however, they did what their advisor suggested because the advisor is the trusted expert. I think about a number of my clients who would quite happily sell a kidney if I suggested there was a tax saving to be made. I think to judge the unwary as if they are the morally repugnant is unfair.

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05th Feb 2019 14:34

I could possibly be sympathetic, except at no point does Gordon address the 'loan' repayment.

The reality is that for these schemes to work the loan cannot be repaid, to suggest otherwise is simply a lie. The government may well be 'bending' the rules by demanding that loans be repaid by a set date....but you can see why!

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to justsotax
06th Feb 2019 09:43

If the scheme was set up purely to avoid tax and no other reason and there is refusal to repay the loan, then I agree, if it was set up for other reasons (ie. asset protection) and a loan is genuinely made and can be proved to be genuine in all matters then I disagree and it cannot therefore be a lie. You like HMRC are blinkered that 100% of the cases are false. NOT SO.

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to justsotax
06th Feb 2019 09:43

If the scheme was set up purely to avoid tax and no other reason and there is refusal to repay the loan, then I agree, if it was set up for other reasons (ie. asset protection) and a loan is genuinely made and can be proved to be genuine in all matters then I disagree and it cannot therefore be a lie. You like HMRC are blinkered that 100% of the cases are false. NOT SO.

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08th Feb 2019 16:28

What a lot of whining! These smart alecs thought they could get away with not paying any tax whilst working people paid their dues in the usual way. Now they have been outsmarted and they are getting hammered and they don't like it. Welcome to the real world, guys!

My experience has been that these are mainly faux-loans that are never actually supposed to be repaid and the firms that ran these schemes in Douglas or wherever disappeared as soon as the cracks started to show.

Just one thing that's right about this article. Taxes don't pay for the hospitals. As Modern Monetary Theory shows, governments do and then collect tax to control the money supply.

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By gordo
08th Feb 2019 20:26

The Government introduces a new law with retrospective effect that rides a horse and cart through the Taxpayer protections that Parliament saw fit to introduce to the Taxes Act... and your response is "a lot of whinnying".

The Government desperately want you to believe that technically its not retriospective, but

-The Lords say its retrospective in its effect(https://www.accountingweb.co.uk/tax/hmrc-policy/lords-call-for-urgent-lo...)

-Baroness Kramer says its retrospective (https://goo.gl/csZWbt)

-ICAEW says its retrospective (https://www.icaew.com/-/media/corporate/archive/files/technical/icaew-re...)

Ray McCann President of CIOT says it's worse than retrospective (http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidence...)

Keith Gordon tax barrister says it's retrospective (https://www.accountingweb.co.uk/tax/hmrc-policy/tax-barrister-throws-the...)

But you think they are just 'smart alecs' for getting away with acting within the law as it stood at the time.

The House of Lords ruled in Dextra that loans were not taxable. HMRC actually dropped that argument against Rangers, having lost in the Lower and Upper tax tribunals trying to argue that loans were taxable, but then brought in a new law in defiance of the Courts to get their own way backdated...but you know better that these are just 'faux loans'. if only the Courts had your insight.

Perhaps you can enlighten us as to who has disappeared and exactly what cracks you refer to? I remind you again that no Court has ever ruled that loans are taxable.

As for the lesson on economics, don't make me laugh. the last published whole of Government accounts show a net debt on the Balance Sheet of £2.4 trillion and an annual deficit of £418 billion once you factor in the cost of funding overinflated public sector pension schemes:(https://www.gov.uk/government/publications/whole-of-government-accounts-...). According to HMRC the annual amount that they wish they could have collected from all (legal) tax avoidance was £1.7 billion (https://assets.publishing.service.gov.uk/government/uploads/system/uploa...)

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