Peers come out charging on deepening loan payment saga

Witnesses in this 15 July 2021 session were Jim Harra, Chief Executive Officer at HMRC and Mary Aiston, Director of Counter-Avoidance, HMRC. The session also saw debate about a document dump of emails shared between HMRC officials that has prompted loan charge campaigners to further question the legal footing of the Government’s policy in this area. Separately, HMRC praised the CIOT’s Low Incomes Tax Reform Group (LITRG) for its help and guidance to  members of the public caught up in the Loan Charge saga.

Committee Chair Lord Forsyth of Drumlean, Conservative, asked about an email released under Freedom of Information (FOI) laws in which Jim Harra had said that he had found it difficult to understand the basis for the HMRC position that loan schemes had never worked. Defending himself, Harra told Lord Forsyth: “My concern was more that in addition to dealing with taxpayers on their cases, there was a public discourse going on in which claims were being made that I felt we were not adequately refuting at the time.”

But Lord Bridges of Headley, Conservative, said the email showed ‘an entire policy was created without clarity about the law’. Harra replied that it took several years of litigation for HMRC to get a good precedent, and of course there is still litigation on going. He added: “Lord Morse said in his review… that from December 2010 it has been clear that disguised remuneration does not work. That is why he recommended that the loan charge be amended to apply from that date and not from 1999, which was the original legislation.” But Harra accepted that for a significant period the law was not clear.  He opined that many people have been misled by people who have advised them but ‘there are people who have very knowingly and well advisedly entered into these schemes in an attempt to avoid tax’.

Can you describe for me why you say that the loan charge has been a debacle? asked Lord Bridges. Harra said: “If you look at what has happened, we have had a campaign, frankly, of misinformation. We have had the targeting and harassing of HMRC officials, including, for example, photographs of an officer’s home being published on social media. We have had false allegations being made about the honesty of senior officials, including me, and false evidence given about our actions. We have at times been slow-footed in responding to all that and in getting our views across, and I think we have found that challenging to deal with. That is what I meant by it being a debacle.” He suggested the Morse Review supported his view that the policy could have been improved from the start.

Lib Dem Baroness Kramer questioned whether HMRC have a legal opinion that provides the basis for the extrapolation from the Rangers case through to the actions that HMRC feel it has been appropriate to take against individual contractors. Harra replied that in each case, HMRC establish their legal basis for recovering tax, either from the employer or from the end user, adding that first preference is to recover from the employer and ‘that is where the bulk of the recoveries have come from’. Kramer came back and said that ‘if it is the interpretation that the agency is in effect the employer, as applicable under Rangers, that would indeed change the whole status of the individual contractors and, as far as I can tell, remove their liability’. Harra said there is ‘no single, overarching opinion’ on this and ‘case by case, we look at the legal basis for who is chargeable’. His HMRC colleague Mary Aiston said that around 30 per cent of the settlements are with employers, but that is accounting for about 80 per cent of the tax that HMRC have brought into charge through those settlements. She added that HMRC understand that there is often quite a long string of employment intermediaries involved, and it is possible for a worker to be in disguised remuneration without the agency being aware of that.

Kramer asked about umbrella companies. She said companies both public and private are very anxious not to be responsible for trying to determine to whom IR35 applies, and therefore find that the umbrella company route gives them the buffer against HMRC that they wish for. Aiston said HMRC estimate that even in the freelance and contracting area, just two per cent to 2.5 per cent of contractors have used disguised remuneration. But she was keen to say the Government has committed to establishing a new single enforcement body in this area, and it will bring legislation through in an ‘employment Bill’ in ‘due course’. Aiston also said there is a new requirement to provide a key information document, which started from April last year and is a legal obligation to set out things like minimum pay levels, who will be paying you and how often. She added: “Our early indications are that, on average, people working for umbrella companies are paying more tax now than they were last year.”

Harra said HMRC’s immediate approach is to equip workers to understand whether they are being ‘abused or misled’ and to enable them to contact the tax authority if they have any concerns. On mini umbrella companies, Harra said it is generally not an issue to do with disguised remuneration. They are often fraudulent schemes designed to fragment employment so that they can abuse the VAT flat rate scheme and the employment allowance, he said, adding that, “[w]e have recently made a number of arrests in relation to mini umbrella companies and taken steps to deny the right to recover input tax where we have established that a business elsewhere in the supply chain knew, or should have known, that they were engaged with fraudsters.” But Kramer was not impressed with HMRC’s approach, saying it is misguided to expect a cleaner or somebody working for £10 an hour in a test centre to have the sophistication to be able to understand the complexity of all these issues. She wants something ‘more aggressive’ in providing protection for contractors who are finding themselves in this position."

Harra explained that the way in which the tax avoidance market has changed in recent years. He said: "One way in which the tax avoidance market has changed in recent years is that it has moved from a focus on relatively affluent taxpayers, who can afford to have professional advice and for whom, when we come along afterwards and say, 'Your avoidance didn’t work. Here’s your tax bill', that might be a painful sting for them, but generally speaking it is not a life-changing even rogue agents. The market has changed and that, today, the promoters are targeting employment-based schemes and middle earners and are increasingly moving down the earnings range. Those people are less equipped to get independent advice and understand what they need to do, and if they are presented with a big tax bill, that will be more than a painful sting; it will be a life-changing event and potentially distressing for them."

Bridges claimed one in five people using the Government’s Check Employment Status Test (CEST) gets an ‘undetermined’ response and this shows that the law is not clear. Harra replied that the CEST tool is nothing to do with disguised remuneration and rather it is about helping people to establish whether they are employees for tax purposes.

Aiston told Labour peer Viscount Chandos that HMRC will have completed the vast majority of Loan Charge refunds by the end of the year. Aiston apologised for the slow pace of refunds but explained that it is not as simple as identifying the voluntary element and refunding it, because if HMRC just did that it would breach the contract, and all tax and duties brought into charge would then be subject to being refunded. She added: “They are absolutely not all the same. Working through and ensuring that we get this legally right so that people get the money they are entitled to, but also that the Exchequer retains the money it is entitled to for public services, is an important piece of work.”

Lord Haskel, Labour, asked about time to pay arrangements and what HMRC are doing to help people affected by the Loan Charge. Jim Harra said HMRC will not force anyone to sell their home or dip into their pension pot to pay either a disguised remuneration tax bill or the loan charge and HMRC have not petitioned for bankruptcy to recover a disguised remuneration loan or a loan charge bill.  HMRC have introduced a simplified time to pay arrangement for people, and also bespoke arrangements for them. Between when the Loan Charge was announced in Budget 2016 and 31 March this year, HMRC have settled about 16,600 cases with employers and taxpayers, bringing in around £3 billion for the public purse, added Harra.

Lord Fox, Lib Dem, asked 'who signs off on forcing people to go into bankruptcy and selling their houses? Which department in HMRC signs off, or is it handed over to a debt management agency?' Harra said: “We do not use any private sector companies for that purpose. We use debt collection agencies to supplement our desk-based resources for the early stages of debt collection, so contacting customers, but any decisions about enforcement action are taken by HMRC’s debt management service and not by external suppliers or contractors. We have a specialist insolvency team that takes decisions about whether to petition for bankruptcy or to liquidate a company, which, relative to the number of debtors we deal with, we do in a very small number of cases.”

Referring to an email released under FOI, crossbencher Lord King of Lothbury said: “If the underlying principle was clear but it all depended on the individual circumstances, you could not possibly have asked your staff to send you a general basis for the legal basis for your procedures here. What were you looking for when you sent that email?” Harra replied that in December 2010 the Government announced further anti-avoidance legislation, which is now in Part 7A of the Income Tax (Earnings and Pensions) Act, for disguised remuneration schemes. In Lord Morse’s finding, that should have put beyond doubt in anyone’s mind that these schemes could not work to save tax. Therefore, he concluded that the Government were within their rights to subsequently apply a loan charge for loans that were entered into after 2010, because it should have been clear to anyone who entered into loans after 2010 that they could not have the tax benefit. For the pre-2010 years, although HMRC had been arguing for a long time that those schemes also did not work, it was not until 2017 that the Supreme Court ruled in the Rangers case that they did not work. Lord Morse had concluded therefore that the Government should not apply the loan charge to those pre-2010 loan arrangements, because although HMRC was clear that they were challenging them and arguing that they did not work, there was no great overwhelming court decision that said so until 2017 when we got the Supreme Court decision in the Rangers case, said Harra. On his email, Harra said it was intended to challenge HMRC officials to do better at getting HMRC’s line to cut through in the public discourse. He added: “It was an expression of my frustration that we did not seem to be able to get our line to cut through in that discourse. It was not questioning whether we did have a legal basis for what we were doing, because I know that many experts have applied themselves to it over the years.”

On disguised remuneration, Harra said HMRC are tackling the promoters, and have recently been given more powers to do that, but the promoters that are left now in the avoidance market are the ‘hardcore’ and they are adept at hiding behind front companies and hiding offshore. They are ‘really difficult’ to tackle, he said. HMRC are also communicating both generally and specifically with the taxpayers concerned to alert them to the dangers, and continue to act against cases where HMRC have lost tax to recover it.

On the off payroll rules, Aiston added: “Our communications campaign has been running since the autumn with a message about tax avoidance under the banner of “Don’t get caught out”, and we are continuing that through the summer. We are indebted to the Low Incomes Tax Reform Group (LITRG), which has been a great help to us in giving its feedback on what messages cut through for its client group, who are people on low incomes.”
Lord Monks, Labour, understands that loans subject to the Loan Charge have been sold on and almost a secondary market is developing in this area, and that the new owners are seeking the repayments of amounts of tax from HMRC. Aiston explained that typically this is happening where a promoter has sold its loan book on to a third party, typically offshore. They are then seeking to recover usually part of the loan, the original loan to the customer. She said: “We recognise that risks serious financial pressures for customers and all the emotional distress that goes with that. We recommend to customers that they check their paperwork and that they seek legal advice on this. The Low Incomes Tax Reform Group (LITRG) has put out some good advice for customers in this position, and we also hope to get some advice out very soon.”

But Baroness Kramer intervened and said the basis of action under the loan charge has always been that these were not genuine loans; that they were essentially disguised remuneration. However the argument on the other side has been that they are legitimate loans. When they are sold on and then collected, you would have thought that that is a characteristic of a legitimate loan, she suggested. Something cannot be both disguised remuneration and a legitimate loan so that you pay taxes on it as if it was income and then you pay it back to someone because of its characteristics as a loan, she argued.

Harra replied that HMRC have not relied on arguing that these were not loans, saying ‘the loan charge legislation says that unless you have repaid your loan by a certain date the loan charge will apply to the balance that is outstanding at that date’. He added: “That is why I think the Low Incomes Tax Reform Group (LITRG) is saying to any users who are now receiving demands for repayment of their loan to check their paperwork, to check who advised them, because they may find that they have arguments that it is not repayable or that someone did not advise them correctly, and therefore they have recourse. As I say, I believe that there are two group actions disputing that. We very much welcome what the Low Incomes Tax Reform Group has put out to help people. As Mary [Aiston] says, we hope to put out some advice to people about what they should do if someone argues that they should repay their loan. HMRC is not a party to what is now happening with these.”

But Kramer came back, again, and said she struggles to understand how the principle of fairness is being applied if it is a loan that must be repaid but it will be taxed as if it was a non-repayable distribution of income. Harra told her that: “It is a new thing that these users must grapple with, but it is a consequence of the arrangements that they have entered into, which are not arrangements that HMRC is a party to. They will have to do what LITRG have advised them, which is look into whether in fact they can withstand or reject these demands. As I say, I understand that two large groups of users are doing just that.”

In a separate exchange with Lord Fox, Harra said there have been about 15 contractors working in HMRC who have used loan payment schemes while working for the tax authority. He said: “When we find those people and they are still working for us, we immediately terminate their engagement, or if they are working for one of our suppliers we tell the supplier that they must be taken off our contract.”

The transcript is here.

By Hamant Verma