Not enough progress on loan charge, say peers
HMRC have not made enough progress on the loan charge more than a year after a review concluded the policy caused serious distress to some taxpayers, according to a House of Lords committee.
Last week (22 January), Lord Bridges of Headley (pictured thanks to Parliament UK), Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, sent a long letter on behalf of the peers on that committee to Financial Secretary (Tax Minister) Jesse Norman that sets out the peers’ concerns. This follows the committee’s short inquiry in December into the loan charge, which looked at handling of loan charge cases and the actions taken to tackle promoters of tax avoidance schemes more widely.
The committee’s recommendations include, in relation to the loan charge:
- The Government should look again at the definition of reasonable disclosure
- HMRC must be transparent about the principles it applies in settling individual cases
- There should be reform of the process for refunding voluntary restitution payments
- HMRC should consider closing down open enquiries for years before 2010-11 without further action
And more broadly:
- The committee welcomes the Government’s plans to take further action against promoters of tax avoidance schemes
- HMRC should, as a priority, work with other relevant government Departments and industry bodies, with a view to introducing regulation for umbrella companies
- HMRC should take further steps to avoid using employment agencies and contractors - and suppliers - that use disguised remuneration or other tax avoidance schemes
The loan charge is designed to tackle disguised remuneration (DR) avoidance schemes where a person’s income is paid as a loan which is not repaid.
In September 2019, the Government commissioned Sir Amyas Morse, the former head of the National Audit Office, to lead an independent review of the charge. In his report, published in December 2019, Morse recommended (among other things) that the charge should not apply to loans made before 9 December 2010, and that, instead of taxpayers repaying multiple years’ income as a lump sum, they should be offered the chance to split this cost over three tax years.
The Government accepted a majority of Morse’s recommendations but did not accept a recommendation to introduce a write off of tax due on the loan charge after 10 years for individuals whose time to pay arrangement is longer than 10 years, as – they argued – this would allow those who have avoided tax through use of DR avoidance schemes more favourable terms than taxpayers with other debts.
In the letter to the Financial Secretary Lord Bridges summarises what the committee heard from witnesses during its brief inquiry, before drawing 11 conclusions and setting out 16 recommendations.
Loan charge – response to Morse and HMRC communications
The letter states that witnesses gave a mixed response to HMRC’s recent report on their progress on implementing the loan charge since the Morse Review. It highlights that Meredith McCammond of the Low Incomes Tax Reform Group (LITRG) told the committee: “HMRC has responded quite well to the Morse Review. It put out guidance quite quickly on the changes he recommended to the design of the loan charge, issued letters to taxpayers, and issued the draft legislation. It took on board the comments Morse made about its failings in its attitude to taxpayers, some of whom were in real distress”.
But the letter notes that the Loan Charge Action Group (LCAG) highlighted ongoing flaws they perceived with the way HMRC administers the charge. The group claimed many people actively engaged in settlement discussions were denied the opportunity to settle by 30 September 2020 due to HMRC delays. LCAG also complained to peers about a lack of equality of treatment between taxpayers with people receiving different time-to-pay arrangements, different timetables for settlement, and different treatment over the granting of extensions to the 30 September deadline. The letter states that these concerns are supported broadly by evidence received from other witnesses.
The letter also cites evidence given to the committee by tax barrister Keith Gordon, who said that ‘HMRC are used to dealing with deliberate tax avoiders: they have not been able to recognise that the loan arrangements were largely entered into by unwitting avoiders’.
The letter cites the evidence of LITRG’s McCammond that a HMRC had improved its loan charge communications since the Morse Review: ‘The wording of its letters improved and its advisers’ soft skills in dealing with taxpayers improved’. She added that HMRC is now ‘regularly sharing [template] letters with LITRG and other stakeholders such as TaxAid to ask us for our feedback and comments’. The letter notes that Glyn Fullelove, giving evidence for CIOT, stated that there was now ‘a recognition that this is a different type of avoidance’ affecting different groups of taxpayers, while Taxation editor-in-chief Andrew Hubbard added that it took HMRC some time to realise that some of those affected by the loan charge had not even been aware that there were issues with their tax affairs.
But in some cases, communications were not effectively tailored, said McCammond. LITRG told the committee that HMRC ‘still seem to be having difficulty accepting the idea that many of those affected by the loan charge … are vulnerable agency workers who are basically being exploited by engagers using loan schemes for their own ends’.
The Committee’s conclusions
- The commitments of HMRC are all too often not reflected in what taxpayers experience with regard to the loan charge. Too many cases the committee heard raise the question of whether HMRC is following the spirit as well as the letter of its Charter, as well as the recommendations of the Morse Review, in its actions.
- It is encouraging that HMRC appears to recognise the different characteristics of those lower-income taxpayers who became caught up in disguised remuneration schemes without being aware of the risks, but HMRC needs to do more to take account of their specific circumstances in its dealings with them.
The Committee’s recommendations
- HMRC must be transparent about the principles it applies in settling individual cases, to address the evidence the committee heard on the inconsistency with which it applies the loan charge to different taxpayers.
- For pre-December 2010 schemes, HMRC should clarify its intended approach to ongoing enquiries.
- In the spirit of the Morse Review, peers would encourage HMRC to consider closing down open enquiries for years before 2010-11 without further action, for the same reasons the Morse Review recommended their being removed from the scope of the loan charge.
- HMRC should communicate directly with taxpayers whom it has identified would benefit from the concessions made following the Morse Review, but have not claimed them.
- We would welcome clarification of the appointment process for advisers to the Morse Review, following concerns we heard about its independence.
Loan charge – payments and disclosure
The Government accepted a recommendation in the Morse Review that taxpayers should have the option to spread payments over three years. HMRC said in December 2020 that fewer than 2,000 of 21,000 eligible taxpayers had done so. LITRG’s McCammond suggested reasons which included that the form that people have to use is online, and the paper version is ‘quite tricky to get hold of’. And the form that you have to complete to tick the box to say you want to make the spreading election actually asks you a whole raft of other questions. McCammond noted that very few time-to-pay arrangements had been put in place, which she suggested may be related to the detailed income and expenditure assessments that were required to be paid. Concerns were expressed to the committee over the time limit for elections too.
Another measure introduced after the Morse Review was a provision excluding taxpayers from the loan charge where they had made ‘reasonable disclosure’ of a disguised remuneration scheme in their tax returns. There were criticisms of the way HMRC had implemented this recommendation, with witnesses arguing ‘reasonable disclosure’ for these purposes had been defined too strictly and did not reflect the intention of the Morse Review. CIOT’s Fullelove told peers: “More discussion may be needed with HMRC about the interpretation of [reasonable] disclosure. HMRC may currently feel bound by certain precedent and think that it cannot relax the meaning of the term further”.
With regard to voluntary restitution payments, the letter notes that Andrew Hubbard told peers that ‘the forms are very, very complicated. HMRC fills in some information and gives a relatively short amount of time—I think it is two weeks—for people to respond. With the best will in the world, it is almost impossible to understand whether those calculations are right or wrong’. McCammond added that people having to make an application rather than the refund being automatic means that a lot of people are going to take the view: ‘I’ve paid it. I should let it go, put it to bed and get closure’.
The Committee’s conclusion
- There have been challenges in implementing some aspects of the Morse Review recommendations. The committee stated that it understands how desirable it is to resolve issues as soon as possible, but the time allowed for taxpayers to take advantage of concessions has proved insufficient, and HMRC has made processes for claiming them too complex.
The Committee’s recommendations
- The Government should look again at the definition of reasonable disclosure. The current test is too narrow; instead, it should reflect what would have been deemed reasonable at the time of disclosure.
- HMRC should extend the time available for taxpayers to elect to spread payments.
- HMRC should reform the administration of payment spreading, reflecting concerns over the inability to negotiate time-to-pay arrangements where an election to spread payments has been made.
- There should be reform of the process for refunding voluntary restitution payments.
Loan charge - loan recalls
LCAG said the fact that loans are being recalled exposes the fundamental unfairness of HMRC’s approach. HMRC insists the loans were not loans, but income, yet are taking no account of recall. “This is cruel as well as unfair,” said LCAG. LITRG told peers that action should be taken to protect taxpayers from this situation.
The Committee’s conclusion
- It is difficult to see how there can be early resolution of loan charge cases while HMRC pursues enquiries initiated many years ago and which were effectively stalled in the interim. These include cases relating to disguised remuneration schemes excluded from the Loan charge following the Government’s acceptance of the recommendations made in the Morse Review.
The Committee’s recommendation
- The Government should move quickly to find a solution for taxpayers who are being asked to repay loans on which they have already paid tax. One possibility would be to legislate that, where loans have been repaid, tax paid in respect of them – whether under the Loan Charge or the terms of a settlement – should be refunded.
Targeting promoters and marketing of tax avoidance schemes
The committee heard that, even if issues around those schemes within the scope of the loan charge were to be fully resolved, there are still new tax avoidance schemes in existence and being promoted, and that these should be the focus of HMRC’s activity in the longer term. The letter notes that CIOT’s Fullelove said that HMRC have improved their approach in dealing with new schemes, but promoters have been difficult to keep up with because they have exploited the use of the internet and search engines to sell directly to people or to set up umbrella companies through which they have sold. They have based themselves offshore, he said, and they have closed their operations down as soon as an investigation has been started.
LITRG’s McCammond stated in evidence that she is not convinced that tweaking that regime by adding further measures such as making them get professional indemnity insurance will have much of an impact. LCAG highlighted what they perceived as the more lenient treatment given to promoters by comparison with taxpayers.
It was agreed by witnesses that, as well as targeting schemes and their promoters at source, there was a need to tackle the way schemes were marketed in order to reduce the number of people who were exposed to them. Fullelove told peers that HMRC had long needed to undertake ‘earlier engagement with Google, the platforms and the ASA and to ensure that these businesses had no business to do, rather than trying to prosecute them later’. But LCAG were more critical, saying the promoters simply change the wording and continue to advertise. Such arrangements are sent to contractors via email on an almost weekly basis, says LCAG.
Witnesses expressed concern that there was no direct liability for unpaid taxes for promoters of tax avoidance schemes. McCammond said: “The only thing that can stop promoters is if HMRC gets behind limited liability and finds a way of pinning the promoters either with the penalties or with the PAYE their associated entities have avoided. Pinning those personally on the directors is the only way to stop the promoters”. LCAG supports a change in the law to make promoters directly liable, and also said that the selling of tax avoidance schemes that later fail should be made a criminal offence.
The Committee’s conclusions
- There is no question that tax avoiders should be targeted by HMRC, but there remains insufficient focus on promoters of disguised remuneration schemes. More also needs to be done to ensure that those – such as large employers and agencies – who could do more to ensure tax compliance and prevent the use of such schemes do so.
- There should be an emphasis on symmetry of treatment between taxpayers and promoters. The Government should continue to consider what action it can take against promoters to stop them selling these types of scheme, including considering whether – and how – promoters could be made directly liable for unpaid tax arising from such schemes. The Government is taking retroactive measures against the users of such schemes; the same approach should apply to those who promoted and sold these schemes.
- The committee welcomes that HMRC is doing more to tackle schemes at source, including the marketing of these types of scheme through its work with the Advertising Standards Authority. It is important that more is done to reduce the exposure of taxpayers to such schemes in the first place. There should also be a renewed focus on ensuring consumer protection and preventing the mis-selling of schemes.
The Committee’s recommendation
- The committee welcomes the Government’s plans to take further action against promoters of tax avoidance schemes.
Tackling unregulated umbrella companies
Some witnesses expressed concern to the committee that IR35 had resulted in a growing use of umbrella companies in employment supply chains, which may increase the number of taxpayers exposed to loan schemes. But when asked about these risks, Mary Aiston from HMRC told peers that ‘I do not think there is a link’ between the off-payroll working rules and disguised remuneration. With Carol Bristow of HMRC adding: “We would say that the off-payroll rules do not in any way force people into using tax avoidance schemes.”
The Committee’s conclusions / recommendations
- HMRC should, as a priority, work with other relevant government Departments and industry bodies, with a view to introducing regulation for umbrella companies.
Responsibilities of large employers and agencies – and HMRC
Large employers were not sufficiently diligent in ensuring tax compliance within employment supply chains, the committee was told. For example, we were told that many employers who recruited workers through agencies had no scheme or standard for working with agencies who are certified as tax compliant. LITRG’s McCammond suggested that ‘agencies could do more due diligence on who they are asking workers to work through’. Particular concern was expressed about the use of disguised remuneration schemes by workers engaged by employers in the public sector, particularly in relation to the targeting of workers in the NHS.
Aiston of HMRC told peers that there were 15 occasions that we have identified where somebody who was a contractor doing work for HMRC was also at the same time using a disguised remuneration case. Of those 15 people, five had already stopped and HMRC took ‘immediate action’ to end the contracts of the other 10, so they were no longer working with HMRC. She said: “We will continue to run those checks. We are clear with the agencies that we work with that they need to meet the certain standard… if we found that the agency was not, then that is something we would take very seriously.”
The Committee’s conclusions/recommendations
- It is surprising that large employers and agencies, including those in the public sector, are not subject to clear protocols on contractors’ use of disguised remuneration schemes, leaving employees at risk of being caught up in them.
- HMRC should practice what it preaches and take further steps to avoid using employment agencies and contractors that use disguised remuneration or other tax avoidance schemes.
- HMRC must continually review its suppliers to ensure that none are themselves using aggressive tax avoidance vehicles.
The committee also makes some general recommendations to HMRC in the letter:
- HMRC should ensure there is a balance of priorities between recovering missing tax and treating taxpayers fairly.
- HMRC should review how it conducts enquiries which can only be resolved by legislation or litigation.
- HMRC should review the deployment of its resources. It is clear that counter avoidance has been generously resourced in recent years but it is not clear that equivalent funding is going elsewhere within HMRC.
- We continue to believe that government takes too limited a view of the issues raised by increasing self-employment, with a focus on revenue generation and not on the wider issues raised in the Taylor Review.
The full letter published on 22 January 2021 can be viewed here.
By Hamant Verma