It was a game of two halves but the result was a stalemate.
There was a debate in the Commons on the Loan Charge last week, on a motion moved by Conservative MP Ross Thomson. It had to be stretched across two days because an unexpected water leak in the roof of the Chamber curtailed the first days' debate. This meant that MPs had to wait until the second day of the debate yesterday (11) to hear the Government's response.
Among Thomson’s proposals was a call for an immediate suspension of the loan charge for a period of six months, for all related settlements to be put on hold and for an independent inquiry into the Loan Charge to be conducted by a party that is not connected with either the Government or HMRC.
In the end, Tax Minister Mel Stride told the Commons that 'it would not be right' to delay the loan charge, because it would be unfair to taxpayers who had not used these schemes. So although the motion was carried, the Government can ignore it and it looks like it will.
Oddly, because of the elongated debate, the loan charge actually came into effect inbetween the two sessions. The loan charge requires at least 50,000 contractors who used loan-based avoidance schemes to pay tax on up to 20 years of income in one year.
Day one (4 April 2019) - MPs demand suspension of Loan Charge
Thomson complained that HMRC has yet to show any regard to the ‘enormous pain’ that this legislation has already inflicted on thousands of people. Many of his constituents working in the oil and gas industry were actively encouraged by their companies and professional advisers to enter into these schemes, ‘without a single peep from HMRC’, he said. There were many interventions, most supportive of him, during his speech.
Thomson said that HMRC was breaking legal safeguards that ensure fairness. “Those safeguards include time limits, and the Treasury Committee heard evidence from the president of the Chartered Institute of Taxation, Ray McCann [who said]: “In reality, the retrospective effect actually displaces all the protections that taxpayers are given by Parliament in terms of getting certainty for their affairs”.”
Of the 1,768 responses received by the All Party Parliamentary Group on the Loan Charge, nearly a third of people have received no information whatsoever from HMRC about the charge, said Thomson. He said more stories emerge every day from people who fear the break-up of their family and a future devoid of opportunities as they face lifelong payments to cover HMRC demands. “HMRC has blatantly gone after the softest target—individuals who have the least to defend themselves—while largely ignoring those who are most culpable in proliferating these scheme”, he added.
Other Conservative contributions
David Davis pointed to the House of Lords committee finding that MPs did not adequately scrutinise the loan charge when it was being introduced in 2017. “I think part of the blame lies with HMRC, but part of the blame lies with the employers. Many people have said that that is where HMRC should focus its effort, but the House of Lords Committee found ‘little evidence of action taken against those who promote disguised remuneration schemes’.” He suggested HMRC should make clear public statements when it is looking at avoidance schemes. Because of the fact that so much of the burden of the decision falls on HMRC, it should make it clear to the public at large and anybody in those schemes when it is investigating them. Davis said that, if the retrospection on the Loan Charge is not dropped, he “will start to pursue a right in law for every citizen that limits the extent to which the state, and particularly HMRC, can take any retroactive action whatsoever against persons, not companies, such as the Vodafones, but against individuals, because it seems to me that MPs owe a duty to our constituents to have some certainty from the state in relation to the taxes they pay.” A judge-led inquiry is the only way we will bring people back together, he concluded.
Justin Madders said his constituents raise concerns that if they manage to reach agreement with HMRC, they will be required to sign a settlement document that stops them reclaiming money from HMRC if they are later judged against in a judicial review. The retrospectivity of this sits uncomfortably with him, but the idea that the Government will not be bound by future court decisions goes very much against the rule of law that we are used to in this country, he added.
Sir Mike Penning said many people are petrified of their employers knowing. He said: “I am slightly concerned about the reference to tax judges. Ray McCann, the president of the Chartered Institute of Taxation, has said that technically the charge is not retrospective—so that is the position the taxation people are going to come from—but he went on to say that it has an effect of being retrospective. That sounds like semantics to everybody else out there, but that is what a specialist judge involved in taxation will look at when we argue the point. The point is that it is clearly retrospective, and that is where the [tax] Minister and I completely disagree.”
Royston Smith said there are very few people caught up in this who we think went deliberately out of their way to avoid tax. Sir Henry Bellingham pointed out that some early-retirement benefit schemes—so-called EFRBS—are also being unpicked retrospectively, causing an equal amount of pain and suffering to constituents, including one of his constituents who is having to pay back £175,000. Andrew Rosindell called the charge ‘a deeply un-Conservative action by a Conservative Government’. Dame Cheryl Gillan said HMRC should ‘abandon its pursuit of these individuals’.
Crispin Blunt said HMRC appears to have failed adequately to inquire into notifications by ‘honest taxpayers’ about their use of a scheme under DOTAS when HMRC had the chance. Justine Greening complained that overwhelmingly, people declared these arrangements ‘transparently’. They sent in their tax returns and some were given tax rebates. Greg Hands said the average of £13,000 can mask some of the very large numbers involved. Joseph Johnson said the time has come for HMRC to acknowledge that we must now have an independent inquiry led by an experienced tax judge.
Alex Chalk said one of the problems is that the advice was given so long ago that the opportunity to seek redress from advisers who gave negligent advice may have gone. Those advisers may now be out of business or otherwise unavailable for litigation. Following on from Chalk’s remarks, Laurence Robertson spoke of a ‘legal disjoint’: if someone were to seek redress, they can go back only six years, or maybe nine years if they have only just become aware of the problem, whereas HMRC is going back 20 years. Dr Matthew Offord said his constituent had been sent a bill by HMRC for £91,000, but it was revised down to £41,000 when she challenged it.
Few MPs defended HMRC but Sir Paul Beresford said that, contrary to what many people had said, “I have found that individual approaches to individual taxation experts in HMRC have been extremely positive: cases have been listened to, and we have secured some dramatic changes.” He said he could not believe that some of his constituents – ‘bright, independent professionals’ – had taken up the loans when they were ‘just too good to be true’. James Cartlidge pointed out that if anyone using one of these schemes had gone to hospital, they would have expected not to wait any longer or shorter than anybody else who pays their taxes. These schemes were taken up because people wanted to reduce the tax they were paying, he said.
Nic Dakin said HMRC, in not speaking out or acting to prevent these loan schemes from being used for 18 years, while they did not give explicit approval, certainly gave implicit acceptance. The reality is that people who wanted work were pretty much forced to go into these schemes, he said, adding: “HMRC’s actions are also self-defeating, as they will undoubtedly push ordinary working people into bankruptcy, restricting HMRC’s ability to recover these tax liabilities.” relation to the taxes they pay.
Ruth Cadbury, a vice-chair of the APPG on the Loan Charge, said evidence to its inquiry shows that HMRC was aware of these promoters, yet none has been investigated and prosecuted. Cadbury claimed HMRC have used behaviour change specialists in pursuing the loan charge, which may explain the aggressive and opaque nature of its communications. She added that the Rangers Supreme Court case, which remains the position in law, had determined that individuals are not liable, their employers are, yet HMRC is misinterpreting the outcome of that case. The Loan Charge needs to be paused for at least six months and should be reviewed by a qualified tax judge completely independent of the Government, she said.
Adrian Bailey said it is all right for HMRC to say people will not have to sell their house, but if that is their only asset and they have to realise their assets, they have no alternative. Jim Cunningham said those who encouraged people in their employment to get involved in such schemes should be the ones to pay up, not the victim. Tanmanjeet Singh Dhesi called on the Government to provide assurance that HMRC will support people with manageable repayments so that no one needs to be made bankrupt. Jim Fitzpatrick said his constituents had disclosed all the loans they received on their tax returns and ‘described in detail exactly what their tax arrangements were’.
Seema Malhotra said 100 people had been affected in her west London constituency. Mohammad Yasin said no one disputed that HMRC has a right to challenge companies and individuals who have participated in tax avoidance arrangements, but HMRC had powers long before the loan charge legislation was proposed and these were not exercised, ‘making a mockery of the existing legislation and denying taxpayers their legitimate right to have their dispute resolved by the courts.’
Sir Edward Davey (Lib Dem) is the chair of the Loan Charge APPG and praised the cross party support on this issue. Sir Edward said that all the tax professionals the APPG had consulted could not find any example on the statute book ever of a Government passing a law to override taxpayer protections. One thing that he will pursue after this experience is the use of open tax inquiries by HMRC. It goes against the whole spirit of the 1970 Act and of the way the rule of law should operate, he said. He urged the Government to call a halt and delay the Loan Charge to send a ‘clear message to people who are suffering mentally and socially with their families and their homes’. A judge-led inquiry is the only way we will bring people back together, he argued.
DUP’s Sammy Wilson complained that the promoters of Loan Charge schemes—many of whom are based offshore or are no longer in business—are not being pursued. He said: “Some evidence that we received suggested that if people did not settle, they might be taxed not just on the money they received, but on the fees taken by those who have now disappeared. Is that fair?”
The curtailed debate can be found here.
Day two (11 April 2019) - Loan charge – minister announces new ‘manageable payment’ team
MPs picked up from where they left off in the resumed backbench Commons debate on the 2019 Loan Charge yesterday. The debate had begun a week earlier but had to be suspended before the government could respond when water started leaking through the roof of the Commons chamber.
The debate took place on a motion moved by Conservative MP Ross Thomson. Among Thomson’s proposals was a call for an immediate suspension of the Loan Charge for a period of six months, for all related settlements to be put on hold and for an independent inquiry into the Loan Charge to be conducted by a party that is not connected with either the Government or HMRC.
In between the two debates, the Loan Charge has come into effect.
Stephen Metcalfe said minimising tax exposure has always been a legitimate part of our tax system. He gave the example of a freelance IT professional who used one of these scheme. He contacted HMRC at the time in 2012 to check for compliance with DOTAS and was informed that no hallmarks of tax avoidance were in evidence and so HMRC did not assign a DOTAS number to that arrangement. He told MPs that the IT worker even dutifully declared on his tax return the amount he had received in loans and the amounts he had returned thereof – but is now being chased for money by HMRC under the Loan Charge. Metcalfe wants a delay in implementation and a removal of the retrospective nature of the charge, so that it does not go back further than 2017, when the charges were first announced.
Richard Harrington said the way to deal with this is to say that if people went into this because they were reasonably advised to, or told to by their employers, then even if they are liable, HMRC should have the flexibility, on a humanitarian and a mitigation basis, to say, for example, that the money should be paid back over a lengthy period—monthly, quarterly or whatever.
Bob Stewart asked the Treasury to reconsider the interest charges, saying ‘they are far too high and, as a decent gesture—because these people did act decently—the interest charges should be dropped entirely. Such a move would go a long way to lessen concerns among my constituents, and it would be a fair way to proceed, bearing in mind HMRC’s lack of warning to participants in loan schemes’.
Sir Geoffrey Clifton-Brown said that, as far back as 2004, the Government said they would legislate to stop these schemes. The Government legislated again in 2011, but it was not until the Finance Act in 2017 that the loophole was closed. Bill Grant said the circumstances of some people caught up in the loan charge may be the result of unfortunate omissions in advice from professionals or HMRC.
A number of MPs felt promoters of the schemes should be being pursued harder. Sir Michael Fallon said it ‘feels wrong’ that the equivalent effort does not seem to be being put into pursuing promoters, or the employers, and that the entire weight of recovering the so-called tax gap is falling – in his view – only on the employees. Peter Aldous said HMRC are not doing enough to pursue those client organisations, agencies and umbrella groups that benefited from setting up disguised remuneration arrangements.
However Mary Robinson said HMRC is now chasing promoters, highlighting that the tax authority recently won a legal case against a tax avoidance scheme provider, Hyrax Resourcing Ltd, collecting £40 million in unpaid tax. Hyrax users were paid just enough to comply with the minimum wage, with the rest of their income made up of loans that were transferred to an offshore trust in Jersey. She thought this was the right way to go about tackling this issue and the charge should be put on hold.
Ruth George said a constituent was informed on Tuesday 2 April that he needed to make a settlement agreement by that Friday, when he was working abroad and had no access to his account. She said: “That sort of behaviour is simply unreasonable, and no taxpayer should have to accept it.” She said that HMRC says “that it does not expect anybody to have to sell their main residence, yet it is requiring taxpayers to seek to take out a large loan or mortgage on their only or main residence. These people are often in their late 40s or 50s, coming to the end of their working life, so they cannot take out such large loans on their property, and if they do they are in danger of defaulting, in which case they will lose the property anyway.” She urged the Treasury to look at the professional indemnity insurance for the accountants or advisers who had advised those affected, and at whether the scheme promoters were covered by the Financial Services Compensation Scheme, ‘because if it was pensions or any other area of financial services, we would be going straight to professional indemnity and to the Financial Ombudsman Service to seek compensation’.
Wes Streeting said HMRC have fallen ‘woefully short’ of the standards we should expect, both in their lack of timely communication with taxpayers and in the way they have, in his view, misled legislators in calling for them to legislate for the Loan Charge. Marsha de Cordova called for a judge-led independent enquiry into the charge,
Shadow Chief Secretary to the Treasury Peter Dowd replied to the debate for Labour. He asked whether the Government will undertake a distributional analysis of the impact of the loan charge, something Labour tried to get through a failed amendment to the last Finance Bill. Dowd does not believe that the Government have done enough to pursue third parties who promoted such schemes
Dowd said: “I would like to raise a point first made by Ray McCann of the Chartered Institute of Taxation to the Treasury Sub-Committee in December. He pointed out that the charge might be applied to those who had previously notified HMRC of their use of the scheme through the disclosure of tax avoidance schemes, but HMRC did not follow up on the disclosure—a point raised by many others. In the evidence session, Mr McCann suggested that that might leave the Government in murky legal territory when trying to apply the loan charge to individuals who had disclosed and included a DOTAS number on their tax returns. The review published last week seemed to suggest that a minority of cases were affected and rejected the assertion that legal issues may arise here. Can the Minister comment on that and say whether any action has been taken to rectify what seems to be a failure of HMRC to investigate DOTAS in some cases?”
Peter Grant responded to the debate for the SNP. He said many of the companies that are most culpable have conveniently been wound up – but the people who set them up have not been wound up. “They are still there and they can still be traced”, he said. Grant added that in many other civil debt cases, if the person who is owed the money does nothing about it for years and then tries to claim the money with interest, it is time-barred and they cannot do it. Why are HMRC not subject to the same restriction, he asked. He cannot support a full amnesty because an inquiry would identify the people who should be held to account and who should pay back substantial amounts of back tax.
Responding to the debate for the Government, Financial Secretary to the Treasury Mel Stride once again challenged the idea that the charge is retrospective. Contrary to the suggestion of many MPs that this issue has ‘just suddenly appeared and HMRC has just started to address these scheme, it has been taken through the courts over countless years,’ he said. The minister said that there has been a concerted effort by HMRC ‘over many, many years’ to clamp down on these particular arrangements. HMRC ‘very, very rarely’ has a situation where somebody is placed in bankruptcy, he said, and HMRC has publicly stated that nobody will lose their primary residence as a consequence of settling their Loan Charge liability.
Of the 6,000 settlements to date and the £1 billion that has been brought in, 85% by value has come from employers, not employees, the FST told MPs. In the first instance, HMRC will go to the employer, not the employee, he emphasised.
On promoters, HMRC are currently investigating more than 100 promoters and others involved in the promotion of tax avoidance, said the minister. That includes promoters of disguised remuneration schemes. HMRC has also made successful complaints to the Advertising Standards Authority in relation to disguised remuneration schemes to stop promoters making misleading claims about the arrangements they are selling. In recent years, HMRC has also litigated a number of cases of failure to disclose under DOTAS, which came in in 2004 — not recently — and several recent decisions in cases on disguised remuneration have been found in HMRC’s favour, he said.
On the affordability of payment arrangements the minister said that HMRC are authorised to agree tailored repayment plans for those affected by the loan charge based on ability to pay. There is no maximum repayment period, and plans of 10 years or more can be put in place where required. Further, he announced that HMRC ‘is now forming a dedicated team focused solely on agreeing these manageable payment arrangements for those due to pay the tax they owe by way of the loan charge.’
On interaction between vulnerable people and HMRC regarding disguised remuneration and the loan charge, the minister said that, wherever HMRC is engaging with vulnerable people, it will do everything it can to ensure that they have all the support they need. “This support includes a helpline that is dedicated solely to looking after loan charge customers, with a team fully trained to identify those who may be vulnerable and to provide appropriate support.” He said he coould confirm “that HMRC will be expanding its specialist service for customers with additional needs so that it will include anyone who finds their tax affairs under scrutiny. As we roll out that additional support, we will start with those affected by the loan charge as our first priority.”
The following motion was passed without a vote:
That this House expresses its serious concern at the 2019 Loan Charge which applies from 5 April 2019; expresses deep concern and regret about the effect of the mental and emotional impact on people facing the Loan Charge; is further concerned about suicides of people facing the Loan Charge and the identified suicide risk, which was reported to HMRC; believes that the Loan Charge is fundamentally unfair and undermines the principle of the rule of law by overriding statutory taxpayer protections; expresses disappointment at the lack of notice served by HMRC and the delays in communication with those now facing the Loan Charge, which has further increased anxiety of individuals and families; is concerned about the nature and accuracy of the information circulated by HMRC with regard to the Loan Charge; further regrets the inadequate impact assessment originally conducted; understands that many individuals have received miscalculated settlement information; calls for an immediate suspension of the Loan Charge for a period of six months and for all related settlements to be put on hold; and further calls for an independent inquiry into the Loan Charge to be conducted by a party that is not connected with either the Government or HMRC.
While the motion represents the view of Parliament, there is no obligation on the Government to act upon it and the minister’s closing remarks indicate that the Government do not intend to act upon it.
Ross Thomson, the Conservative MP who obtained the debate, said at the end of the debate that: “Those of us who have been campaigning against the loan charge are not going to go away any time soon. We will keep engaging and campaigning on this issue.”
The full second day debate can be found here.