Questions of retrospection and unfairness exercised MPs in this debate about the Loan Charge, in the House of Commons this week (19). The context of the debate was Sir Amyas Morse’s review of the Loan Charge, published in December 2019.
David Davis moved a motion that said “the Loan Charge is an unjust and retrospective tax; notes that the law on the Loan Charge was not settled until 2017; and calls on HMRC to cease action on loans paid before 2017.” The motion was also in the name of Labour’s Ruth Cadbury and Conservative Dr Julian Lewis. It passed without a vote though carries the weight only of an expression of parliamentary opinion, rather than legislation.
The proposer – David Davis
Opening the debate David Davis (pictured) said the Loan Charge is ‘ruining people’s lives’ (there have been at least seven suicides because of it, he claimed). According to the Loan Charge APPG, 39 per cent of those affected have had suicidal thoughts, he said. The MP went on to say some 68 per cent have suffered depression, 71 per cent face bankruptcy, and 49 per cent could lose their homes. Many of the individuals affected will be contractors. They will be people who perhaps have no rights at the moment and certainly no way of finding the money.
Morse recommended a December 2010 cut-off date for the loan charge because It is the date from which the Finance Act 2011 ensured that tax was charged on income paid through loan schemes. But Davis argued the Finance Act was not law in December 2010; it was simply draft legislation. It was not passed for another eight months—until July 2011. HMRC do not, or certainly should not, take their instruction from draft legislation, said Davis. Sir Amyas has argued that once the 2011 Act was passed ‘tax should have been understood as being due from that point’. But David said that even in 2011 the law was far from clear after the Government suffered a series of defeats in the courts.
HMRC, which has claimed that this is clear law, lost the Dextra Accessories Ltd and Sempra Metals Ltd cases in 2002 and 2008 respectively, when the courts specifically rejected the idea that the loans could be subject to income tax. HMRC then lost a case in 2012 and again in 2014, demonstrating that the 2011 legislation had not clarified the law to the satisfaction of the courts.
Davis told the Tax Minister: “When you are doing deals with Vodafone and Google, where they pay from 10 per cent down to four per cent, do not turn round to an ordinary locum nurse and say, ‘It’s too good to be true. You should have known’.”
Sir Desmond Swayne intervened in support of Davis to say the ‘’proof of the pudding in the fact that the 2017 legislation was introduced. Davis said the Treasury and HMRC failed to write clear and comprehensible legislation. Labour’s Dr Rupa Huq intervened in support to clarify we are not talking about city slickers or international bankers, rather we are talking about unrepresented taxpayers such as locum nurses, social workers, careworkers and hospital cleaners.
Davis hopes the Government will now stop playing with words and finally concede that this is indeed a retrospective measure—’an unprecedented retrospective measure’. He wants MPs to make clear that, in the future, HMRC can under no circumstances act retrospectively. And for the Government to change December 2010 to July 2017. He closed his speech by saying: “Tax law is the only part of English law where innocent until proven guilty does not apply.”
Other Conservative backbench speeches
Dr Julian Lewis contrasted the approach to war widows, who will not get retrospective pensions, and people who will be hit retroactively by the loan charge. Lewis said uncertainties arising from IR35 legislation led tax experts to approve umbrella company loan schemes. Many self-employed public sector workers, among others, had no idea that they were being paid by means of such loans. If HMRC had been doing its job properly, it would have sanctioned the purveyors of those schemes and warned the victims. Such schemes are still being sold to thousands of people who clearly still have no idea what is waiting for them from HMRC further down the line. The Morse review’s decision to exempt people affected prior to 2010 leaves people who were bullied into making large payments relating to the years before 2010 unable to get those settlements rescinded. People were left in ‘blissful ignorance’ for years on end by a government body that is now playing catch-up. The Loan Charge is not, in any case, full and final settlement, and therefore does not close open years, he warned.
Stephen Metcalfe said we are dealing with ordinary people who were either forced or persuaded into schemes that they were advised were perfectly legitimate and approved by HMRC. It is very clear to him that HMRC sees the Loan Charge as a panacea for its historical and obvious failures. In the light of the uncertainties caused by the current situation with coronavirus and its effect on freelancer’s ability to work and earn at this time, he asked that the existing legislation be amended so that the loan charge is made prospective from 2017 onwards, which would remove at least one level of uncertainty for this important group of people at this very difficult time.
Paul Holmes welcomed any shortening of the time for which people affected are liable for these payments, but even after 10 years the payments over three years are too ‘regimented and draconian’. He added that it is vital that a bespoke, compassionate team be set up solely to deal with the vulnerable people in our constituencies who are affected by this Loan Charge issue. The Tax Minister needs to make it clear that the people affected by this are ‘victims’.
Bob Stewart said the Government should revisit the settlement terms, which are hugely punitive (if the retrospective nature of the charge is not removed up until July 2017). And the Government should not send out settlement terms using words that imply people have deliberately broken the law. He said: “I see no reason why loan charge repayments should not be delayed by a year, rather like IR35, in response to the health crisis we are all facing.”
The Inland Revenue and HMRC have always permitted both employees and directors to receive loans from the organisations for which they are working, remarked David Simmonds. As a professional in the financial advice business—not as a tax adviser—when these schemes were being rolled out, he said that huge numbers of people avoided them, because they recognised that they were being asked to put something on their tax return that they knew was not correct.
Shadow Chief Secretary to the Treasury Peter Dowd said retrospection has been used since the second world war, but it has always been commensurate with the needs of the nation. Dowd offered a partial defence of HMRC by saying 'a third of its staff have gone since cuts in 2005 and later in 2010’. He said: “The Rangers FC issue trundled on for the best part of 13 years, with enablers—the accountants and lawyers—taking it right to the line and beyond, so let us not pretend there was not aggression from those who were attempting to push and push the boundaries, hence the reason for commensurate potential retrospective legislation..” He went on to support the recommendation for a £30,000, 10-year limit, which the Government rejected.
Christian Matheson said the Loan Charge was put in place unfairly and unjustly as a retrospective measure. We are talking about individuals who had their correct tax returns signed off by HMRC, which agreed that they were perfectly legitimate and lawful under current tax law but then reopened them, not because there was a suggestion that the individuals had provided incorrect information, but because the law had changed or was not quite as HMRC thought it was at the time it signed off those tax regulations. That is HMRC’s problem, not the problem of his constituents, he said.
Bambos Charalambous said the aggressive retrospective action taken by the Government in pursuing the Loan Charge policy and the profound effects that this has had on many people’s lives are quite simply ‘unjust and unfair’. In his view the Morse report has one fatal flaw: it concludes that the law was clear from 2010. There were a number of ambiguities at the time, such as the situation relating to those who are self-employed. If the law was so clear at the time, why did HMRC not enforce the law then, but instead choose to introduce the loan charge in 2017, he asked. The Government and HMRC’s reputation has been damaged by the way that they have mishandled the Loan Charge situation, he said.
The Morse review recommended that, after 10 years, the loan charge should no longer apply to people who earn less than £30,000 a year, but the Government rejected that recommendation, something that disappoints Ruth Cadbury. Are HMRC abiding by Adam Smith’s principles of fair taxation, she asked. Are HMRC and the Treasury abiding by the Nolan principles of public service, particularly selflessness, objectivity, accountability, openness, honesty and leadership, she asked.
Fleur Anderson said the Government should accept the Morse review recommendation that unprotected or closed tax years should remain closed, and that the legislation must treat business owners and directors equally with individual contractors. Anyone still using these schemes should be told immediately of the liabilities that they face.
Lib Dem Sir Edward Davey, who set up the Loan Charge APPG, said the Government have narrowed in a most outrageous way the way we consider the concept of a closed tax year. Sir Ed said no court rulings in any way interpreted legislation in the way that the Morse review does. Tax experts who have contacted the APPG are really clear that Morse is getting the legislation, as it was understood the time, completely wrong. The Loan Charge is retrospective, and that is unfair and wrong, he charged.
Chris Stephens, SNP, said it really is time to end bogus self-employment by dealing with the relationship between an employer and a worker and their status in the workplace. The people HMRC should really be going after are those who contrived and promoted such schemes, because they are the ones who are directly responsible, he believes.
Lib Dem Sarah Olney said HMRC should always take into consideration the fact that taxpayers, in taking responsibility for their affairs, are not expected to be tax experts themselves. She urged the Tax Minister to consider rebates for those people who have paid vast sums already into a scheme that has now been judged not to give rise to a charge.
Independent Neale Hanvey remarked that the current policy has measured those in the grip of HMRC over the loan charge against the gold standard of tax experts and not, as it should have, against the standard of what one would reasonably expect a lay person to understand.
Reply to the debate – Jesse Norman
Tax Minister Jesse Norman said HMRC will take a proportionate and reasonable approach to anyone covered by the Loan Charge who is unable to file their return by 30 September. Norman reminded the MPs that such schemes are a form of contrived tax avoidance in which people are paid in the form of a loan with no interest and no intention or requirement to pay the loan back.
Norman highlighted that part of the Budget is a policy document on tackling promoters of mass-marketed tax avoidance schemes, which he calls a ‘sober and thorough piece of work’. And he praised Morse for “picking up on a widely anticipated and understood gap—[which] is the importance of raising standards in the tax advice market. Again, I am pleased to say that, as part of the Budget documentation, we have published a call for evidence on this very topic, “Raising standards in the tax advice market”. I encourage all colleagues and their constituents to contribute to that approach.”
Norman said the Loan Charge is ‘just’ and considered so by the average man or woman in this country. What people do not pay in tax due, someone else must, he concludes.
The full session is here.