Lords question Financial Secretary over Loan Charge
In response to questioning from the House of Lords Economic Affairs Committee the Financial Secretary revealed that he would shortly be announcing 'clarifications' to the loan charge, including a commitment that HMRC will not apply the loan charge to a tax year which was closed on the basis of fully disclosed information.
Financial Secretary to the Treasury Jesse Norman was questioned by the House of Lords Economic Affairs Committee today on topics including the 2019 loan charge. MTD and HMRC's powers.
The session can be viewed here.
The report below is effectively a liveblog. These notes are mostly based on a single hearing of the committee's deliberations and we cannot guarantee they are free of errors. In places the text has been precised. This is not an exact transcript.
The report uses the following abbreviations -
FST - Financial Secretary to the Treasury LC - loan charge DR - disguised remuneration EBT - employee benefit trust HMRC - Her Majesty's Revenue abd Customs HMT - Her Majesty's Treasury
House of Lords Economic Affairs Committee - Tuesday 16 July 2019
Hearing started 3.35pm
Chair (Lord Forsyth) said committee had gone through some recent changes and they were also being joined by some members of the Finance Bill Sub-committee.
Forsyth ‚ do you agree that some people who took part in DR schemes are more culpable than others?
FST ‚ I don‚ t think the charge fails to discriminate. Legal process of this kind needs to treat people equally. Should be a universally applicable thing. But there are different subgroups within those affected and it is important to understand who they are. A lot of public concern. From the work that officials have done what we‚ ve seen is something like 50,000 people affected. About 3% of them are in healthcare or education. Something like 250 different DR schemes which fall under the LC. This is a very contrived means of attempting to avoid tax involving an offshore trust, a loan document which doesn‚ t have a period of time or any interest associated with it, and doesn‚ t require repayment. That points to its status as a means of tax avoidance.
Forsyth ‚ pointed to evidence where a social worker was made redundant on a Friday and told she could get her job back if she participated in this scheme by the local authority. Then finds many years down the line she gets a bill and it‚ s not the employers, the local authority, who get the bill. That seems to me to be a completely different category of person from an investment banker with a big bonus seeking to avoid tax through some sort of EB scheme.
FST ‚ there may well have been people who were gulled into taking on one of these schemes, and it is inevitable that one will hear about these people, and it‚ s impossible not to be moved by that. But that is a very small percentage‚
Forsyth ‚ it may be a small percentage but if you‚ ve retired and no longer have an income, and receive a bill for £30,000 it‚ s a catastrophe
FST ‚ yes but it‚ s also the process by which you have signed a tax return which turns out to be one which is involved in avoidance of tax. I don‚ t think it‚ s necessarily part of the tax system to try to discriminate between different users and if we applied a discriminatory mechanism between the different users to other forms of taxation we would probably run into criticism from the committee for other reasons.
Kramer ‚ we have asked for distributional analysis. Without this it is very hard for us to see what the actual pattern is. But don‚ t you agree that any interpretation by a reasonable person of rules for treating the taxpayer fairly would recognise the very different circumstances of the two situations which Lord Forsyth described. And isn‚ t it therefore a responsibility of MRC in its role of treating taxpayers fairly to take that on board and adjust its behaviour as a consequence.
FST ‚ ‚ I think in this case the way in which HMRC and ministers have sought to address this issue is not by picking and choosing user groups, given that there is a class of people who were all covered by the LC and who were all involved in DR tax avoidance, but by offering them lots of other support in the process. As you know that has included support from its own customer service hotline, meetings potentially with revenue officials. It has included a reference to the Low Incomes Tax Reform Group, to charities and community service organisations which HMRC funds ‚ Tax Aid, Citizens Advice and the rest. Specialist help for people who may be adversely affected. That in general is how they have sought to address the issue. I should say that there are things government can do and I expect to be announcing in the next few days a series of further clarifications that I think will help to settle some of the public concerns that have arisen in this area. And they will include guidance to make specifically clear, in relation to the LC, that HMRC is not going to seek to tax the same income twice; a more collaborative approach to communications with members of the public who may be affected by the loan charge, which draws on the expertise of the Chartered Institute of Taxation and the ICAEW; a commitment that HMRC will not apply the loan charge to a tax year which was closed on the basis of fully disclosed information, and what is gentilely described as additional flexibility for individuals settling under the published terms who may be in genuine hardship. It is important to say that where a person has no realistic prospect of paying tax due HMRC will stop pursuit and leave any unpaid debt to be collected later only if those circumstances improve, and that is in fact their current practice but I don‚ t think it is widely understood.‚
Forsyth ‚ could I just say that‚ s very much appreciated ‚ the point you‚ ve just made about what you‚ re going to change because that was of course one of the recommendations in our report
FST ‚ I very much took your report on board
Kramer ‚ we really appreciate the fact that closed years have been separated out. Many of the people who didn‚ t have financial advice will not even have known the process by which to achieve a closed year so many of the most vulnerable groups and the least able to pay will not be able to take advantage of that change in direction, though I appreciate very much the change in direction. But closed years are not a complete answer to this issue. I hope very much that as you talk about trying to improve the communication with the public the kind of offers that have been made to people to settle have only allowed something like a five year period in which to make a repayment of a sum of money which is way beyond their means over that kind of period. The pressure has ben on to sell homes, people have dissolved their pension pots leaving their families in a precarious situation. I hope you will be looking at the quality of this assistance programme because I think in most people‚ s eyes it is a very limited form of assistance.
FST ‚ The terms are ‚ it slightly depends on whether you come forward in good faith and undertake not to do this thing again ‚ but very broadly speaking the terms are set to varying and different ways according to circumstance and of course they are different now because there needed to be an incentive for people to come forward earlier and to settle, as 7,000 people have done.
It‚ s also important to separate out the harsh public rhetoric from the reality of the situation which is that if people can‚ t pay they will not be pursued past the point at which they can‚ t pay. I don‚ t think the revenue has made anyone bankrupt in relation the LC so far ‚ that may in due course come. They reserve the right to attach a charge to a property but they do not demand that people sell a property in order to pay tax due. I think they‚ re trying to behave in the most reasonable way possible while trying to preserve the wider taxpayer interest, which is separate.
Forsyth ‚ on closed tax years will that be applied retrospectively, to people who have already settled?
FST ‚ I don‚ t know the answer. I think the expectation is that if people can show that a year was closed on the basis of fully disclosed information, then there may be scope for them to revert even where there has been a settlement. I will have to explore that and write to you. But the points is on the basis of fully disclosed information.
Lord Fox suggested that the amount of effort that is going into the individuals to pay is disproportionate to the amount of effort that is going in to pursuing the promoters. Perhaps in this reclarification process that emphasis should also be changed
FST ‚ what I said was in some of these cases it was impossible not to be moved by some of the specific facts. But it was very important to separate out the relatively small number of people who might be in that kind of position from the very large number of people who might be hiding behind it. And I didn‚ t want to confuse the two. Government should be sensitive to the differences between people who had been involved in these DR schemes. There should be scope and support for them within the system and if they have a further claim in a natural justice way they should have a political opportunity to pursue that but O don‚ t think that‚ s part of the tax system.
Tugendhat ‚ you have shown the complexities which exist. I have sympathy with HMRC. More normally it‚ s criticised for letting people off tax rather than bearing down more heavily on them. This is a special case. Does HMT/HMRC assess the impact of the LC demands on the mental health of individuals?
FST ‚ came back to Fox‚ s question ‚ so far of the £1.5 billion recovered 85% of that has come from employers. The expectation on HMRC‚ s side is by the end 75% will have come from employers. It is true that promotion of a tax avoidance scheme is not a crime. HMRC works hard to bring promoters to book where they have broken the law. It also works hard to create circumstances which encourage promoters to obey the law, eg Hyrax case where promoters have been caught. Where there has been fraud there is an opportunity to go after promoters. If there isn‚ t new POTAS rules create complex mechanism where promoters can be caught, potentially given notice and ultimately named and shamed and possibly fined ‚ and that‚ s intended to be a longer-term disciplining effect. But the difficulty is that in law, not allowing any retrospectively law, it is hard to go after these people.
Responding to Tugendhat, it is hard to see how a survey of mental health might be done. HMRC officials have to deal with people who are concerned about paying tax and may be in some mental distress, every day, so they have quite a sensitised understanding of the extent to which some of these may be the product of mental unhappiness or something of the kind. There are specific approaches within their customer services which are designed to address those issues and to refer them out to specialist agencies if needed.
Burns picked up on the 75-25 expected split between employers and individuals picking up the tax bill. What are the circumstances which bring about the 25% (individuals picking up the bill) situation?
FST ‚ Typically in an employer scheme there may have been an EBT or something of the kind. Money will have been lent through a vehicle to the individual. If the employer can be pursued for the money they will be pursued because this is a form of remuneration which could have been handled by PAYE with the appropriate tax, and it is a matter of public record who the employer is. If the employer has, for example, gone bankrupt or is otherwise unavailable for being sued, there are rules under the PAYE legislation which allow the individual to be pursued for any tax that is owing and that is quite a well established part of the tax code.
Burns asked whether this meant none of these cases applied to people employed by public authorities.
FST ‚ I‚ m not aware of any circumstance where a public employer has paid via a DR scheme. There is a widespread suggestion that public authorities may have used contractors. That runs into the wider problem of recovery from those people.
Turnbull ‚ the committee gave you an example of a public authority involved in this practice. The FST said he was talking about the specific situation of it acting as an employer. Turnbull said there should be a generalised instruction to public authorities that ‚ you will have to settle this‚ .
FST ‚ I don‚ t think we are talking about a situation where a public employer is paying an employee through a DR scheme. Situation where a person is being judged into a DR scheme run by a third party rather than their local authority employer. You cannot under those circumstances pursue the original employer.
Turnbull suggested this was sophistry. We are talking about a situation where borough X had decided that staff who were currently our employees will no longer be directly our employees, they will be dismissed and told they can come back and work for borough X but they will be supported and paid for by some party. That makes them still the employees of borough X. They still have responsibility.
FST ‚ has the committee had any evidence from a public authority that has deliberately used tax avoidance in this way?
Turnbull: we had evidence from someone whose terms had been unilaterally changed.
FST ‚ I am open to cases you may have where a public body deliberately used a DR scheme or deliberately procured staff using such a scheme. But what I think has happened is a local authority has been approached by a third party who say we can supply a service, leave it all to us and that question was not raised.
Forsyth ‚ we will arrange for the clerk to send you all our evidence
FST and Forsyth engaged in dispute about whether we were talking about a situation where a public body is seeking to save money and does not ask questions, or a situation where they knowingly take advantage of DR schemes.
Chandos also raised the mental health of those affected by the LC. He is a director of the Credit Services Association and said in that sector there is a regulatory requirement to track mental health and a self-regulatory code of practice. The numbers affected by the LC are smaller.
The FST said HMRC are not entirely sure who these people are ‚ they have to self-identify. Chandos said it should be part of the process of judging people‚ s ability to pay. FST said HMRC staff are trained to recognise potential distress.
Bowles suggested the FST had said local authorities did not have to do due diligence. The FST disputed that. Local authorities are not absolved from the actions they take through having done it through a third party, said Bowles. The FST again denied he had said this.
Bowles also asked about the mental health issue, saying she had seen text evidence of daily harassment of individuals by HMRC, asking them personal and business questions, with the HMRC texter forwarding the numbers for the Samaritans, and advising the individual not to pursue an IVA so HMRC could collect the money. She considered that financial advice, which HMRC should not be giving. Severe pressure is being put by HMRC on people doing collection to behave like this. How are these people being incentivised?
FST ‚ I don‚ t think this is anything more than one data point. If there is malpractice or abuse they should be pursued for that. Would have to see much wider evidence to see it as evidence of a generally oppressive approach. Lot of evidence I‚ ve seen is HMRC bending over backwards to get better at dealing with taxpayers. Can‚ t comment on compensation arrangements for HMRC officials.
Turnbull ‚ distinction between someone directly employed and working for council through an intermediary. Whole point of this is HMRC claim no distinction and attempted change in status has not changed tax position.
FST ‚ thought we were discussing status of employer v promoter? Distinction there. If someone paid in contrived way via DR scheme that is remuneration.
Cunningham ‚ is there a rule in government which says in no circumstances will depts. employ people using DR schemes?
FST ‚ not aware of one, but there should be one. May be because custom and practice against it. Key question is under what circumstances should a public authority be allowed to use a third party which is using one of these schemes or should it be properly subject to a due diligence process which actually established whether it is doing so.
FST ‚ if there is no evidence of it there may not be a need for steps.
FST ‚ NHS may have used contractors / intermediaries that paid people in this way. If that is true public statement made by ministers makes clear it‚ s unacceptable.
Cunningham ‚ how do we find out if it‚ s happening?
FST - audit process? HMRC has sought vigorously to make clear what rules are. Further regulation? Happy to look at. But can be no doubt that this is not something govt would not be happy about.
Forsyth ‚ it was govt who changed the law on the LC, asking HMRC to go back 20 years; evidene is many people declared on tax returns, made clear involved in those schemes and no action taken, and after they retired and had no income except pension, presented with this bill. If evidence of local authority or health authority doing it bewildered as to why it‚ s retired nurse who gets bill, but surely a distinction between someone who doesn‚ t understand tax affairs and someone who is deliberately undertaking a scheme. Add to that that tax levied on basis of total remuneration which they might not have received because of commission charges by people who are operating the schemes. The people operating the schemes get off scot free because they are operating offshore or for whatever reason. There does seem to be a fundamental injustice here which has in part been created by the law which we passed and its retrospective nature.
FST challenges description of retrospective, but accepted it is retroactive. These were choices made by individuals. Committee need to focus on that.
Skidelsky ‚ it is retrospective. Does a person in those circumstances have a secure port of call ‚ a person to call?
FST ‚ it doesn‚ t seek to open up any tax for liability that wasn‚ t liable at the time. So it‚ s not retrospective. Yes there is a specific telephone number that is properly supported.
If people settled before LC was due they could escape the cost of the fees. Extreme aggression of fighting the LC has brought people who might have been better advised to settle early into a position of hostility with HMRC.
†Fox asked about whether HMRC receives appropriate external scrutiny. The peer went on to says he is seeing a reduction in the number of staff at HMRC while it is required to collect more tax ‚ does that affect their behaviour?
FST disagreed with Fox‚ s suggestion. The increase in enforcement is needed because technology has helped those wishing to avoid tax.
How does the HMT know HMRC is behaving itself in general? asked Fox.
FST - there is a lot of internal sharing of information between HMT and HMRC. He said he is looking at feedback on transparency and customer service statistics.
Baroness Bowles of Berkhamsted - access to justice has diminished in the tax system in recent years. The Government has rejected the Committee‚ s recommendation on right of appeal, for example, she complained. You cannot put everyone at risk because there are some ‚ clever clogs‚ who can game the system, she said.
The FST ‚ agrees with HMRC to look at right of appeal. It is a foundation rule that no-one should be judge and jury in their own cause, after all, he said. However, there is a risk of increasing mitigation and lengthening the process and allowing people to keep their ill-gotten gains for longer, if we tinker with the appeals system. Well organised, well-funded people could gum up the whole system, so there is a balance to be achieved in defining what is in the public interest.
Lord Forsyth said it is wrong that people should be threatened with a higher financial hit if they appeal.
A baroness understand the dilemma of how to balance access to justice with constraining poor corporate behaviour that abuses the appeal system. What criteria can be brought to bear?
FST said he has not reflected on the criteria.
Baroness Kramer - complained about the extension of time limits for assessing offshore matters to 12 years, from four (or from six, in some cases).
FST said- it is well-known part of the tax system that the period you have to keep records can be longer than the time of recovery. On the offshore case, the FST said 2013 is the anchor year, so no new cases before that anchor year.
Kramer went on to say pressure should have been put on HMRC to resolve cases sooner rather than putting the pressure on taxpayers with a slightly onerous task.
She went on to say HMRC consulted on additional powers to allow it to seek information from third parties such as banks without the permission of the taxpayer and even more significantly, she says, without the tax tribunal and no right of appeal. Safeguards are being watered down, she suggested.
FST -† information from third party consultation has been sent back to HMRC for them to ‚ think deeply‚ about it.
A baroness asked how is HMRC monitoring the impact of MTD for VAT on small businesses and asked the FST to share some information on the early results.
FST - 675,000 people have come through MTD so far, a ‚ very fast level of take-up‚ and the private sector is engaged on this. Some 17,000 small businesses signed up yesterday to MTD. He said officials assure him there is no reason to depart from their original cost estimate to businesses (complying with MTD for VAT) of £109 to set up and ‚ £30 odd pounds‚ a year thereafter. There are a series of ways that the system can miscue and this is being addressed. As we get closer to deadline, the ‚ harder to move‚ cases may come in late, which is why it is encouraging that the number coming in is going up rather than coming down.
There is over a million small businesses subject to MTD for VAT, so 675,000 is a ‚ meaningful indentation‚ , he said. The goal is to get to 80 per cent by the due date and HMRC has made clear they will not be exacting any punitive arrangements with companies that do not manage to make it by that date; for those who do meet the deadline, he claimed there is anecdotal evidence that the process of digital elsewhere leads to significant productivity improvements. There may be a kicker effect on productivity for such firms, he predicted.
MTD for VAT is a ‚ very different kettle of fish‚ from MTD for Income Tax and one of the things he has told officials is it is really important for them to be properly detailed in reflecting on the lessons of the MTD for VAT process. He went on to say there is evidence that the system was launched before it was fully ready and there was certain amount of catch up on the fly that he does not want repeated.
On MTD, Lord Livingston of Parkhead said VAT is not unique to the UK. He asked if another country has done this kind of MTD for VAT† better than the UK.
The FST - HMRC seeks to be benchmarked against other tax authorities around the world.
The FST announced that HMRC will be working with the Adjudicator to be much quicker about absorbing issues of complaints and to make themselves a far more complaints friendly organisation. This must be reflected in operational policy and processes. And they are going to be introducing a digital services in order to improve ease of access to people who want to use Adjudicator services themselves. He has agreed with HMRC that they will establish a new professional standard committee which will advise commissioners including taking advice from independent experts and considering issues relating to implementation of powers ‚ so operationally focused. However, it will not consider individual cases, it is to sit above individual case, and nothing to do with reopening issues relating to the loan charge. Details about membership and terms of reference will be published in the autumn.
On HMRC powers more widely, the FST spoke about the extensive HMRC†powers review between 2005-12 and announced that he has agreed with the Treasury that it will have a post-Implementation update. This will mean an evaluation of how those powers since 2012 have played out in relation to safeguard and concerns discussed by the committee today. HMRC will be speaking to stakeholders such as this committee, professional bodies and taxpayers about this. He feels a full HMRC powers review requested by the committee is not ‚ appropriate‚ given that the last powers review lasted until 2012, going on to say his view is that these things should be done ‚ once a decade‚ .
Baroness Harding - only a small number of taxpayers are caught up in the processes that the committee has complained about today but great damage has been done by people reading about them and fearing that they may be caught up in this, in some point in the future.
The FST - HMRC is one of the best tax authorities in the world and he has a great deal of respect for HMRC. HMRC have been the victim of some pretty orchestrated and energetic negative campaigning, he added. HMRC is still widely respected, he believes.
A video of the session can be viewed here.