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The loan charge pantomime

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.

29th Mar 2019
comedy and tragedy masks
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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.

Magic beans

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.  

In disguise

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.

Pay now

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.

Nuclear option

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.  

Late entrance

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.       

Misinformation

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.

Final curtain

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.

Replies (31)

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By Justin Bryant
01st Apr 2019 11:49

The Treasury review was always going to be a whitewash and I am very impressed with whoever it was who spotted that 2012 interest error. Although the taxpayer comments are very depressing they are not surprising/shocking to me as I have heard this from most people affected by this very evil and scandalous retrospective tax, although I am a bit surprised that as much as 0.5% of people in question 42 think HMRC are being fair here!

Also, I have never really been impressed by any MPs before, but Sir Ed Davey and the Loan Charge APPG should be congratulated for calling out HMRC's deceit here. See:

http://www.loanchargeappg.co.uk/news/appg-demand-retraction-and-apology-...

There is another debate on 4.4.19 per the link below:

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CDP-201...

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Replying to Justin Bryant:
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By HMRCVictim
29th Mar 2019 17:28

Justin Bryant wrote:

I am very impressed with whoever it was who spotted that 2012 interest error.

:)

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By HMRCVictim
30th Mar 2019 08:36

Thank you for this article Rebecca. Let’s hope for a good debate next week, a suspension of the Loan Charge to slow for a genuine review and then some thoughtful changes to the legislation in order to avoid devastating the lives of tens of thousands of families across the U.K. who did nothing wrong.

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By jford
30th Mar 2019 15:00

I had a call with HMRC last week and was told they’d received over 200,000 settlement applications. If true that’s a massive payday for HMRC.

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Replying to jford:
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By gordo
30th Mar 2019 20:34

Seems very unlikely as most estimates suggest around 50,000 individuals involved, but yes on average clients have had to write to HMRC around four times since March last year so perhaps HMRC have had 200,000 communications. They could of course try responding to the first one.

Furthermore many individuals have registered simply so that they can understand how much HMRC plan to argue they are due, but that does not commit them to settlement and anecdotally I think HMRC will be lucky to collect from 50% of individuals.

There is an argument that HMRC have been far too greedy with their settlement proposals.

Remember HMRC have no basis in law for collecting the tax from the individuals, which is why they need a new retrospective (in its effect) Loan charge. Though HMRC actually have all the powers they need without having to ride a horse and cart through the Taxes Act with a new retrospective Loan charge, HMRC simply failed to raise the appropriate assessments pre-2011 on corporates because they were busy arguing that individuals were liable to tax on loans.

The Tribunals disagreed in 2012 and 2014 when Rangers were successful. The courts have consistently disagreed in regard to the HMRC argument that loans should be taxable, including the Supreme Court. In regard to post 2011 HMRC once again already have all the powers but they have no Court success that says loans are taxable.

So the only thing coercing people to volunteer settlement is the penal 2019 Loan Charge. HMRC CEO John Thompson has admitted in writing, to an MP, that it is just too difficult for HMRC to win in Court so this new retrospective (in effect) charge allows HMRC to claim the victory that they couldn’t get in a Court of Law, without risking losing in litigation. Quite why Jon Thomson took it on himself to write to an MP and try to justify a new law proposed by Parliament, is eh, interesting.

However, rather than encourage people to settle by offering a sensible sensitive settlement offer, HMRC have gone the other way, probably because the Loan Charge is such a big heavy penal club, that they think they can get away with it. To many, it feels like HMRC are out for revenge.

HMRC wish to tax Loans as if income, but interestingly they do not wish to disturb the true nature of these transactions which HMRC accept (in writing) are entirely properly constructed loans with a legitimate trust. If loans can be written off or brought to an end HMRC want IHT on a transfer of value in a different year to settlement entirely because these are properly constructed loans...(on which HMRC seek to charge income tax!).

HMRC also wish to go back to 1999 even though there was no DR legislation in existence before 2011. Would it not have been more sensible to cap any change at 2011 at the earliest given that the DR legislation introduced in 2011 had no retrospective element. So you get the bizarre situation of people with pre 2011 loans and no open enquires who had every right, under the law, to assume that their tax affairs were finalised...expect now thanks to the loan charge they are open again.

HMRC want people to volunteer settlement for years where HMRC do not have an open enquiry and so absolutely no basis in law to seek settlement. If HMRC had won in Court then HMRC would not be able to tax those years unless arguing a failure to disclose. However HMRC argue that if you don’t volunteer those years then the loan charge will get you. HMRC have said “we win or we win, clever isn’t it”

HMRC also seek interest on all open years all the way back to 1999. Interest averages around 3% per annum, so over 10 or 20 years this adds a substantial amount to the settlement. HMRC have always argued that interest is just commercial restitution and not penal, but HMRC give repayment supplement at a very different rate.

If people need time to pay a voluntary settlement then HMRC seek to add an extra 1% over and above the current statutory rate of 3.25% due apparently to HMRC’s perceived risk that you won’pay the tax you weren’t due.

The loan charge adds all loans together and taxes them in one year, so individuals do not get the advantage of the personal allowances from the year in which they received the advance and also clearly much more will fall into higher rates of tax.

The Loan charge is not full and final settlement. Rather ironically HMRC say they will continue with litigation and seek higher amounts in litigation and if they are successful they will come back for the uplift but if they lose then they will simply take the loan charge. So the loan charge becomes HMRC’s base settlement if people don’t voluntarily settle beforehand. “We win or we win, clever isn’t it”.

HMRC argue, now that there will be nobody left to defend it because they won’t have the cash, having paid loan charge or repaid loans and also paid APNs, that they will seek to tax people on a Gross invoice value based on a Transfer of Assets Abroad. So HMRC argument in litigation is not based on loans, nor is it based on redirected earnings and seeks to tax people on monies they never received. But there’ll be nobody left to fight it.

I understand that some people might say, well hell mend them, that’ll teach them for engaging in legal tax avoidance. HMRC say it’s only 0.2% of the population therefore it’s okay to override the legislation that is meant to apply to 100% of the population, if the end justifies the means and they get to collect ‘tax’ on behalf of the 99.8%.

As it happens there are about 50,000 HMRC civil servants and they need the generous final salary pension schemes funded somehow.

That was maybe a long way of saying I don’t believe the figure of 200,000 but then I don’t believe much of what HMRC say anymore.

This is worth reading http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidence...

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Replying to gordo:
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By jford
30th Mar 2019 22:17

Haha! Thanks. Yes - a very detailed reply.
The 200,000 figure came from a phone conversation with someone manning the settlements helpline. I asked how soon we could expect a response if a settlement pack was sent in. He replied that he had no idea as they were processing 200,000 settlements many of which had only recently come in.

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Replying to jford:
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By KateR
01st Apr 2019 10:36

Have you got phone number for the settlements helpline?
Need to chase up for client who made offer to pay months ago but given no details as how actually to do so.

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Replying to KateR:
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By Joe Alderson
01st Apr 2019 12:19

Try 03000 514 237, someone "might" answer.

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7om
By Tom 7000
01st Apr 2019 11:51

Alternatively, why not repay your loan and avoid this tax.....
Seems like a simple solution, like S455.....

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Replying to Tom 7000:
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By justsotax
01st Apr 2019 12:28

but Tom, the loans were never intended to be repaid - that's the whole idea! (although I still haven't seen anyone fighting this particular cause say as much...)

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Replying to justsotax:
By ireallyshouldknowthisbut
01st Apr 2019 16:22

Setting aside HMRC's standard inept implementation of the new loan rules, and the poor saps mis-sold these things.

Fundamentally these seem to be Schrodinger's loans.

Loans for tax purposes when it suited at the time, but not when its pointed out they still exist, when it all relates to a closed period and cant possibly be taxed 'retrospectively' on the open loan.

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Replying to Tom 7000:
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By Roger.007
01st Apr 2019 17:20

Maybe the company/ trust has closed... Not so simple.

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Replying to Tom 7000:
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By KateR
02nd Apr 2019 12:12

In my clients case, was only a couple of years out of college and had no clue what was going on. Actually included the 'loan payments' as self-employed earnings on tax return. But total was wrong so in interests of doing the right thing is trying to pay the tax due on the balance.

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By Roger.007
01st Apr 2019 16:32

Hi,
The DR rules say they do not introduce new assessing time limits.
https://assets.publishing.service.gov.uk/government/uploads/system/uploa...
"The DR provisions do not introduce any new assessing time limits so the time limits of 4 years (reasonable care), 6 years (careless), 12 years (offshore) or 20 years (deliberate) will apply in respect of the new charge which starts on 5 April 2019."

Has anybody been able to argue the case for the time limit to be considered as 6year (careless) or more likely 12 years (offshore) as opposed to "deliberate" (20years).

If the amount of the money the client took home resulting from being in the loan scheme was less than the amount of money they could have taken home had they used a limited company to full effect, then am I wrong in thinking that a case for HRMC applying the 12 years limit could be made.

??

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By EnglishRose
01st Apr 2019 16:38

Even back in 2002 accountants were writing that the schemes would not work and were artificial - I found a 2002 article on this the other day. Artificial schemes post Furniss v Dawson were always going to be very dubious. In my view even back in the late 90s I saw this as deliberate and thus I don't see why the 20 years should not apply.

Who takes out a loan not expecting to pay it back?

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Replying to EnglishRose:
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By Donald MacKenzie
02nd Apr 2019 09:47

I agree with EnglishRose "Even back in 2002 accountants were writing that the schemes would not work and were artificial ... In my view even back in the late 90s I saw this as deliberate and thus I don't see why the 20 years should not apply."
The profession should not be backing the few firms that promoted and promote rogue schemes.
Those using and pushing such contrived schemes should not profit from them. The tax laws are meant to outlaw such artificial use of process and we should see a few prosecutions of the more outre promoters

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By Donald MacKenzie
01st Apr 2019 16:42

The point here is that taxpayers decided to not pay tax on their income by what was always a dodgy loophope.
If you take money tax free, which is described as a loan, from someone who has received money you have earned, and you have not put down any security and you do not intend to repay it how can you pretend it was NOT income?
I am sympathetic only the the extent that the amounts earned are being taxed in a single tax year and will attract more tax than if the tax had been paid when it should have been.

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Replying to Donald MacKenzie:
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By Roger.007
01st Apr 2019 17:57

Hi Donald. Your final paragraph isn't necessarily correct-if the money was earned in a single year X years ago, it may attract less tax by adding as earned income this tax year. Whilst what was earned income X years ago remains the same, what is counted as earned income this tax year can be changed and be accounted for in multiple ways as well as being pensionable this tax year.

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By gordo
01st Apr 2019 17:36

It surprises me that tax advisers are happy for HMRC to ride a horse and cart through the Taxes Act, and the taxpayer protections as laid down by Parliament, when it is expedient for HMRC to do so.

These loans have been looked at by the Tribunals and Courts and at no time have they deemed Loans to be taxable as income.

Jon Thomson HMRC CEO wrote to one MP "The Loan Charge has also supported our efforts to settle DR cases without the need to litigate." Other HMRC letters admit that no Tribunal has yet ruled on these schemes. The Loan Charge is arguably in defiance of the Courts. HMRC have got the victory they couldn't get in a Court of Law. HMRC have even written "Please also note that the treatment of loans as employment income does not affect their IHT treatment. The fact remains that a fully documented and legally enforceable loan has been used in conjunction with a properly constituted trust. The IHT consequences flow from the use of loans and the trust regardless of the treatment as earnings" So HMRC themselves accept that these are loans, they just want incomes tax....and IHT.

If you are happy that the end justifies the means then so be it, I understand you don't like loan schemes, but just bear this in mind in 2019-2020 when HMRC start again on IR35 and then when, in due course, it moves on to all dividend planning.

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Replying to gordo:
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By Roger.007
01st Apr 2019 18:05

Your final paragraph is spot on. This is the thin-edge of the wedge so to speak.
The loan charge is essentially testing the waters with a small subset of people. Within a few years, HMRC will be aggressively targeting tax planning with small salary, large dividends inside/outside IR35.

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Replying to Roger.007:
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By justsotax
02nd Apr 2019 13:51

the problem is 'intention'....the loans were never intended to be repaid were they?

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Replying to justsotax:
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By Roger.007
02nd Apr 2019 15:50

Hi
To my (basic) knowledge, the Loan Schemes are set up with the intention of never repaying them. I guess the original intention of these schemes was something different, however for the purpose of this, they were not intended to be repaid.
The question of "intention" I think is whether the intention was to avoid paying the correct amount of tax to HMRC with a view to increasing the take-home pay, or not (i.e. umbrella company or role insisted on using this struture, and took enough of a "slice" that made the take-home be the same as say, a limited company).
The difference is more than sematics. In the publication released on 26th, HMRC confirmed that DR used the existing time-limits i.e. 20 years for being"deliberate" in HMRC not receiving enough tax, 4 or 6 year for being "careless", 12 years if it is off-shore and careless.
The difference in 'avoiced' tax between 12 years and 20 years could be quite considerable.

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Replying to gordo:
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By EnglishRose
02nd Apr 2019 20:06

On the second paragraph - didn't the recent Hyrax decision find similar arrangements unlawful?
http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10988/TC0...

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By gordo
02nd Apr 2019 21:44

I think I already mentioned that HMRC have even written: "Please also note that the treatment of loans as employment income does not affect their IHT treatment. The fact remains that a fully documented and legally enforceable loan has been used in conjunction with a properly constituted trust."

The Hyrax case was about whether somebody should have disclosed the strategy under the DOTAS rules. Remarkably, though HMRC knew that the Promoter had ceased trading in March 2017 because it had already been in correspondence with the defence company for some considerable time, HMRC decided to pursue three other companies as promoters, probably because this would then give HMRC the right to issue APNs. HMRC managed to convince the judge that the employer, with no tax expertise, somehow created and marketed the scheme. I expect a JR will be lodged. This case was not about anything other than whether it should have been disclosed under DOTAS or not. Indeed the QC seems to have had to ask HMRC what exactly they were arguing, are they arguing loans are a scam or loans are loans or loans are earnings. HMRC appear to have been unable to clarify.

This strategy I believe also went before the GAAR panel. The so called independent GAAR panel who receive no reward. Though shortly after their decision, the chair of the GAAR panel was awarded an OBE in the Queens honours, which of course are effectively awarded by the one party that is common to every dispute and remarkably has been deemed successful in every decision. It seems to matter not that such an award must undermine the claimed independence of the GAAR panel.

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Replying to gordo:
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By Justin Bryant
03rd Apr 2019 10:13

Not just APNs, but a 20 year discovery assessment period for taxpayers and potentially a whole panoply of nasty penalties etc. for the promoter. If the promoter had reasonable grounds to believe that the scheme was not disclosable before the issue of the order, the order removes that doubt. The law provides that the promoter cannot rely on doubt as to notifiability as a reasonable excuse for not providing the prescribed information within the 10 day period starting the day after the tribunal made the order. This does not mean that penalties will definitely be imposed on the promoter if it does not provide the prescribed information before the end of that period, but any contention the promoter makes that it should not be made liable for penalties because it has a reasonable excuse cannot depend on there being doubt about whether or not the scheme is notifiable. “In cases where a disclosure order is issued by the Tribunal (see paragraph 21.5 of link below) any reasonable excuse which relies on doubt as to whether the arrangements are notifiable ends 10 days following the day that the Tribunal issues the order. This includes instances where the promoter has legal advice that the arrangements are not notifiable”. Thus, there should be no penalties in practice with legal advice re DoTAS. Counsel's opinion declaring the scheme was not discloseable is something on which the taxpayers could rely if a penalty had been raised, and which would have reduced any penalty to zero

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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By justsotax
03rd Apr 2019 13:57

I wonder how many loans of all those taken under these schemes which specifically set out that there is a legal obligation to repay the loan have in fact been repaid in full?

I am betting a big fat zero - well until the Revenue got heavy handed and slightly out of control....

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Replying to justsotax:
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By Roger.007
04th Apr 2019 13:36

Or, more likely, the loans could have been written off or the trust closed. The revenue are getting a touch out of control with the 20 year retrospective, which is about 11 years before the finance act came to prevent them. That is one of the reasons why there is an early day motion to have it discussed in the house of commons. In fact, at this very moment, it is being discussed at the house of commons!!

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By gordo
04th Apr 2019 10:45

Some loans have been repaid. Trustees have on occasion requested full repayment of loans and these have been repaid.

I do understand that people do not like these loan structures, however, HMRC are using the Loan Charge to give them the victory they could not get in Court. No Court has ever ruled that loans are taxable.

If you think it is approriate to make HMRC judge, jury and executioner and Courts and independent judiciary be damned, then perhaps have a read of the APPG report published today which gives a little insight into HMRC's approach.
http://www.loanchargeappg.co.uk/wp-content/uploads/2019/04/Loan-Charge-I...

I would go so far as to suggest that the Loan Charge is not the problem per se, the problem is HMRC and the retrospective Loan Charge is one visible symptom.

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By Roger.007
04th Apr 2019 21:09

The loan charge was discussed in Parliament today ... Before a leaky roof caused the session to be postponed.
https://www.bbc.co.uk/iplayer/episode/m0004brr/house-of-commons-04042019
(1hr 26 mins in)
Transcript:https://hansard.parliament.uk/Commons/2019-04-04/debates/606C0091-A272-4...

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By gordo
05th Apr 2019 08:27

Thanks for the transcript which makes for very interesting reading. Ironically what the Treasury Minister needed today was an Umbrella.

I believe it’s rescheduled and we get to do it all again next week.

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By Rgab1947
05th Apr 2019 10:03

Whatever your vieuw, and I tend to support the faction saying "No restrospective legislation" there is a human cost.

A client who was duped into going the loan route (IT industry) has to pay tax which equates to 2 years gross income. He gets 5 years to pay. He has no savings but a big mortgage (and 2 young kids). Tell me how that works?

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