On 5 April 2019, the loan charge will be imposed on up to 50,000 taxpayers who have been unable to arrange to pay tax due on loans which are now recategorised as earned income.
IR35 behind you
Back in early 1999, Chancellor Gordon Brown had an idea to stem the loss of NIC and tax which was occurring when employees became self-employed contractors then supplied their services through their own personal service companies (PSC). The plan to tax those contractors as if they were employees of the engager was set out in Budget press release number IR35.
After much discussion, during which the burden of paying the extra tax and NIC moved from the engager to the PSC, the plan became law from 6 April 2000. Almost immediately an “avoid IR35” industry grew up.
One of the solutions suggested to step around IR35 was for the individual to work through an umbrella company (an agency that employs lots of contractors), and be paid a small salary plus a large loan. The individual would be taxed on the benefit of having a zero or low-interest loan, and the full value of the loan would be taxed on the employee at the point it was written off.
This is how loan schemes were born and sold, and why a large number of skilled contractors ended up using them. Over time loan schemes have been used to increase the take-home pay of many people who had little idea of what they had signed up for, but they understood the agency was taking care of all their tax obligations.
At this stage, there was no question that the loans would be taxed as salary, although in reality most of the loans would never be repaid, which made them in fact disguised remuneration.
Since August 2006, HMRC has been aware of the numerous loan schemes in use, as promoters and users of tax avoidance schemes have been required under the disclosure of tax avoidance scheme (DOTAS) rules to tell HMRC exactly which taxpayers have used what schemes. It has taken until 2019 for HMRC to successfully prosecute a scheme promotor for not complying with the DOTAS rules.
In December 2010, new tax law (ITEPA 2003, part 7A) was introduced to specifically treat loans given in place of pay and other forms of disguised remuneration, as salary subject to NIC and income tax. But apparently, this new law didn’t stop employers using loan schemes, particularly when they were based overseas.
HMRC opened enquiries into most, but not all, tax returns which included a DOTAS number, but many of those cases mysteriously stalled. This meant the disputed tax was not collected, and the taxpayers may have believed that their case had been dropped.
In 2014, HMRC gained a new power to issue accelerated payment notices (APNs), which allow it to collect disputed tax without having to prove in court that the tax is due. The application of APNs has been challenged in the courts, but with little success.
In 2016, HMRC decided that using tax enquiries and APNs to collect the tax due on the thousands of outstanding loans was not working fast enough. It would, therefore, treat all scheme loans as salary and impose a new tax – the loan charge – on everyone who had either not repaid the loan or had not arranged to pay the tax on their outstanding loans, on the basis that those loans were always salary.
The loan charge is widely regarded as a retrospective tax as it taxes all outstanding loans as earned income in one tax year: 2018/19. In spite of objections from the professional bodies the loan charge passed into law as part of F(no. 2)A 2017 without much fuss from MPs, who had been newly elected following the general election that year.
In 2019 the Loan Charge All Party Parliamentary Group (APPG) was formed and started to challenge HMRC over the operation of the loan charge. The loan charge APPG chair Ed Davey successfully added an amendment to the Finance Bill 2019 to require HMRC to review the effects of the loan charge.
However, when that review was released on 26 March, it amounted to a regurgitation of the time limits involved in the loan charge implementation and did not mention the human costs involved. The Loan Charge APPG slammed this report as a sham and a cynical and misleading attempt at self-justification to cover up HMRC failures.
The APPG has asked for HMRC officers and Minister Mel Stride to appear before their committee to answer questions on the loan charge, but they refused to do so. Instead, Ruth Steiner, HMRC director general, wrote to the APPG outlining how taxpayers could settle their tax debts with HMRC.
HMRC is clearly under pressure over its handling of the loan charge, not least thanks to tireless campaigning by the Loan Charge Action Group (LCAG). Leading barrister Keith Gordon of Temple Tax Chambers has also been quick to correct claims made by HMRC in its factsheets and letters to the APPG.
In the latest spat between the APPG and HMRC, the tax authority is accused of making false statements to the APPG, by refusing to respond to evidence provided in 70 case studies of taxpayers hit by the loan charge. The APPG has also released a survey of 1,768 taxpayers affected by the loan charge, which makes chilling reading.
The loan charge is a tragedy for some and a farce for others. One minor point is that HMRC’s computer has miscalculated the interest due on tax on loans, adding in an extra day of interest for 2012. This clearly illustrates that all calculations concerning the loan charge need to be carefully checked, but above all the taxpayers affected need specialist help to deal with their tax debts.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.