MPs angry at 'retrospective' loan charge

The loan charge was announced at the 2016 Budget and passed into law in the Finance (No. 2) Act 2017. It aims to ensure that users of tax avoidance schemes which disguise income as a loan pay their share of tax. It does this by adding together all outstanding loans and taxing them as income in a single year.

The government says the schemes affected by the 2019 loan charge were never legal. That is disputed by those affected by the charge and their allies, who have mounted a campaign against it as the Loan Charge Action Group (LCAG). More than 100 MPs have signed an early day motion calling on the government to significantly revise this piece of legislation. 

The debate

Backbench MPs

The debate was obtained by Conservative MP, and former minister, Steve Baker. Baker said that he objects to the loan charge because it is retrospective legislation that undermines the rule of law. He argued that it breached the Chancellor’s own statement in 2005 that a taxpayer should be entitled to know with certainty what he may or may not do in planning his tax affairs.

Retrospectively taxing something that was technically allowed at the time, is unfair, said Baker. He placed the blame on the promoters of these schemes. He contrasted HMRC’s impact assessment of the measure, which said ‘this package is not expected to have a material impact on family formation, stability or breakdown’, with the LCAG saying that the human impact of receiving a bill for up to 10 years’ worth of tax will have a ‘catastrophic effect’.

A Freedom of Information request revealed that HMRC has issued about 23,000 loan charge awareness letters, which were only issued from the second quarter of 2018. HMRC says that 50,000 individuals may be affected, so many will be unaware of the impending charge, Baker said. The LCAG suggests that historical users of schemes who left many years ago are probably completely ignorant of this new legislation and will only hear of it after receiving a large bill some time in 2020. This is a ‘dreadful risk that the government should forestall’.

The MP recommended that there should be a legally mandated text accompanying every advertisement of a DOTAS-registered scheme that explains that the purpose of registration is to enable HMRC to identify tax liabilities and to recover them when such schemes are proven not to work. It does not imply any kind of legitimacy, and registration with HMRC is not for the purpose of endorsing the schemes.

When HMRC becomes aware that a taxpayer has subscribed to a DOTAS-registered scheme, it should contact the taxpayer and make them aware that registration has the purpose of enforcement and does not convey legitimacy, he said. HMRC must take into account people’s circumstances, and the threat of insolvency should never be used as a kind of extrajudicial punishment.

He also suggested that the loan charge should apply from Royal Assent onward: prospective not retroactive or retrospective.” He added: “More steps should be taken against promoters and introducers of such schemes. They are the ones profiting from this misery. Finally, the issue of employment status and IR35 requires action at last, to bring the uncertainty to an end.”

The proposed 20-year range is usually reserved for blatant acts of criminality, said Siobhain McDonagh (Labour).

She said that many of those affected acted in good faith and were acutely unaware that they were ever doing anything wrong, with several of those impacted forced into schemes as prerequisites of taking up a job.

She pointed to LCAG analysis of those affected: it highlights the fact that 68 per cent describe depression, 71 per cent fear bankruptcy, 31 per cent fear relationship breakdown and 39 per cent have suicidal thoughts. She accused HMRC of “ruthlessly pursuing hard-working contractors, while rolling over in the face of obvious and aggressive tax avoidance by so many of the UK’s largest corporations.”

She concluded: “While the government bankrupt unknowing individuals across the country, multibillion-pound corporations make a laughing stock of their tax collection efforts. It is high time that those organisations and those who have enabled the schemes described today were made to pay their fair share once and for all.”

Conservative Peter Aldous said the Glasgow Rangers Football Club case, on which the 2019 loan charge is based, concluded that the tax liability fell on the employers, which to him raised the question why HMRC is not pursuing the client organisations, agencies and umbrella groups. He said the loan charge undermines the cornerstone of taxation, which is that a government should not seek to impose or increase a tax charge on income earned, gains realised or transactions concluded at a time before the legislation was announced.

Julian Knight (Conservative) said regulators should look at the poor and potentially dangerous advice given by accountants about these schemes. Joseph Johnson (Conservative) wants action against the Queen’s counsel who ‘peddled rinky-dink’ advice that encouraged many people to participate in these schemes, in the belief that a QC’s opinion rendered them beyond the reach of HMRC. Alex Chalk (Conservative) is concerned that individuals are sometimes effectively left without a remedy, because the person who gave them that advice so many years ago no longer continues to trade.

Jim Fitzpatrick (Labour) quoted from an LCAG briefing stating that the schemes “were, and still are, legal and in most cases the motivation behind their use was not to reduce tax but simply to comply with the poorly drafted IR35 legislation, which 18 years on, remains unclear.” He asked the minister: “Why did it take HMRC 20 years to take official action? Why did HMRC not email or write to loan users over the past 20 years, to ask them to come out of these schemes and the associated risks, when it had the relevant information on the yearly individual self-assessment tax returns? Why ask for 20 years’ retrospective payment for something that was and is legal? Why has an appeal format been refused to loan scheme users, leaving costly judicial review as the only alternative, which single individuals cannot afford by themselves?”

Fitzpatrick added that: “The Loan Charge Action Group has now discovered that HMRC itself was using and paying contractors who are now subject to the loan charge. The LCAG has been contacted by people in that situation reporting that they are working on important IT projects for HMRC, were security-cleared by HMRC, and were working through arrangements that HMRC has now declared to be tax avoidance schemes. In effect, that means that HMRC was itself involved in arrangements that it now says “never worked.”” He asked the minister to comment.

Conservative Ross Thomson said many who worked in oil and gas were actively encouraged by their companies to get involved with such schemes. He quoted a constituent who had written to him and said: “As we are unsure where we’ll get the money to pay any outstanding tax, their bullying tactics in getting you to sign up to pay and the fact they demand you to reach a settlement with them, even though when we have done everything they ask, they have still not come back with any settlement figures. Not only that, they are saying even if you settle or pay back the loans, there’s a strong possibility it won’t end there, so we go back to their scaremongering tactics they’ve deployed for you to pay up front and ask questions later, it’s totally unjust for our future as being a democratic society”.

Lib Dem Sir Edward Davey suggested MPs should be working cross-party ahead of the Report stage of this year’s Finance Bill to put together a new clause that deals with the problem, under which any loan charge would come into effect only after Royal Assent of the Finance (No. 2) Act 2017. He said 16 constituents had contacted him directly: “I have had people almost in tears in my surgery over a tax matter, which has never happened before in 20 years”. He added that back in the late 1990s and early 2000s he “had the pleasure of sitting on nine consecutive Finance Bills that dealt with the early history of IR35. We had huge arguments then that that was wrong.

There is an inherent issue that needs to be tackled, but what is proposed is absolutely not the way… [HMRC] appears to me to be acting vindictively because it did not get its way a few years ago on IR35. Because people found legitimate ways around it, it is coming back and acting in an outrageously draconian way, and this House has to say no.”

Julia Lopez (Conservative) said for nearly two decades HMRC appeared to permit tax advisers and accountants to recommend the schemes without penalty, but her Hornchurch and Upminster constituents believe they have been let down by a system that should have alerted them to problems in a timely manner. She confessed that she found herself caught “between the concerns of constituents and the assurances of Ministers”. She feared “that the fairness and legality of HMRC’s actions will end up being determined in the courts by those with the tax expertise to look dispassionately at these matters.”

Janet Daby (Labour) and John Hayes (Conservative) both said the genesis of the matter was the change to IR35 in 2000, which, said Hayes, led to many freelance, contracted and itinerant workers ordering their financial affairs, notably for the purpose of paying tax, in a way that they believed and were told was completely proper and in line with the new regulatory environment. Subsequently, umbrella schemes developed as some of those people’s tax and financial affairs led them to the point where they became liable for employer’s national insurance contributions, he added. Many within the schemes have yet to be informed of the amount that they are due to pay, said Janet Daby. Hayes advised the Minister “that when this many hon. Members from both sides of the House come together in a single cause, he had better take action. The writing is on the wall and he has to respond.”

Dr Julian Lewis (Conservative) said a constituent, a chartered accountant, had told him that HMRC already had sufficient power to recover tax from individuals, “so it is rather its own convenience and its unwillingness to apply its existing powers that have led to this legislation”.

Mark Prisk (Conservative) said at least four of his constituents have said that they were told by their companies that unless they signed these new forms of contractual relationships, they would not continue to work for those companies.

Justin Madders (Labour) said there is a lack of reality and a lack of genuine engagement with the individuals affected, by HMRC. He quoted a constituent who had told him: “We really are normal people, who operated within the law at the time, itemising everything on our tax returns, paying benefits in kind tax on the loans and operating under a registered scheme with a reference number lodged with HMRC at the time.”

Opposition frontbenchers

Kirsty Blackman (SNP Treasury spokesperson) said she had been approached by many constituents about the charge. “Some were recommended to join these schemes by the companies they worked for, which wanted them to move on and become contractors. One person told me that a presentation was given in the company’s boardroom by another company running one of the schemes. Individuals were encouraged to go to that presentation and transfer into one of the schemes rather than being employees of the company. That is a real concern.”

There needs to be a mutually beneficial payment arrangement, said Blackman. People are being told that the settlement figures will not be calculated until 5 April, but they have also been told that they will need a payment plan in place by then in order to be compliant, she said. If that settlement figure is not calculated until April and the payment plan will be required immediately, people do not have enough time to make the decisions they need to make on any settlement figure. She also complained that a constituent who is disputing the calculation made by HMRC had not been given a breakdown of the calculation to let them work out why HMRC came to that figure. “There needs to be transparency so that people understand why HMRC thinks they owe what it says they owe, and they can then make rational and reasonable decisions about payment plans,” she added.

Shadow Treasury Minister Lyn Brown (Labour) said: “If what is being reported is correct, it is an absolute disgrace that hospital cleaners, locum doctors, nurses, council workers, social workers and other people who work hard for the public on low or moderate pay were recruited into these schemes by tax advisers and bogus umbrella companies. It is an absolute disgrace that the government are determined just to take on those individuals, rather than those who facilitated this avoidance for profit—those who fully knew what they were doing, and did it anyway.” She added: “I cannot justify a professional tax expert setting up such a scheme and getting a nurse, a social ​worker, or someone else on a low or moderate wage involved in it. If it is not illegal for those tax experts to do that, it bally well should be.” She concluded: “Labour supports strong ​measures against tax avoidance. We want the government to go much further. We want them to go after the enablers, those who knew that the schemes were tax avoidance and illegal, but who peddled them anyway.”

Government response to the debate

Economic Secretary to the Treasury John Glen replied to the debate for the government, as the Financial Secretary was in the main Commons chamber dealing with the committee stage of the Finance Bill. He began by stating that the government believes that it is ‘not fair to ordinary taxpayers, who pay their tax on time and in full, to allow people who have used tax avoidance schemes to get away with it’. 

On the question of action against those who created and promoted the loan schemes the minister said that it was “absolutely the case that HMRC is pursuing those individuals… Five cases are before the courts—that seems a small number, but each one covers a large number of individuals - and there has been a judgment in one, with the other four cases still moving through the courts. It is not right to say that HMRC is not engaged with those who promoted the scheme.” He undertook to ‘engage with HMRC to get a letter [sent to the MPs] setting out the action taken’ against enablers. 

On Baker’s implication that, when a tax avoidance scheme has been disclosed, that is somehow a verification or an endorsement of it, Glen said that is a misleading perception that has been left, and something for which HMRC should be accountable. On the claim that the charge is retrospective, the minister said this was not the case “because it sets out Parliament’s intention: payments subject to the loan charge should always have been, and will be, subject to tax.” He claimed that that 1,500, or three per cent, of affected individuals were involved in the health and education sectors but most of the scheme users worked in professional services. There is support for people who have used the schemes and now find themselves in difficult situations, he added.

Responding briefly at the close of the discussion, the debate’s proponent, Steve Baker, said he really hoped that the Treasury would look at the measure again and eliminate retrospection. “When people have acted in good faith under advice and end up subject to injustice, we must uphold the principle of the rule of law.”

The full debate can be read here.

By Hamant Verma.