Home Financials Loan Charge: MPs inquiry accuses HMRC & The Treasury of misleading Parliament

Loan Charge: MPs inquiry accuses HMRC & The Treasury of misleading Parliament


Loan Charge: MPs inquiry accuses HMRC & The Treasury of misleading Parliament

HMRC has again had its knuckles rapped by Parliament over the controversial 2019 Loan Charge, with the publication of a scathing report into the policy by a cross-party group of MPs established to examine the unpopular tax.

The Loan Charge is unnecessary, “unfair”, “is actually in defiance of the rulings of the Court”, and “gives HMRC the victory that only they believed was due”, concluded the damning inquiry of the Loan Charge All-Party Parliamentary Group (APPG).  Their report, published last Wednesday, just days before the Loan Charge took effect, calls for an immediate suspension to the tax, an independent review led by an experienced tax judge and changes to the leadership within HMRC.

The APPG’s inquiry follows a highly critical report into HMRC’s expanding powers by the House of Lords Economic Affairs Committee in December, which recommended a review of HMRC’s powers and a broadening of HMRC’s accountability with increased oversight from Parliament, including the consideration of the establishment of an independent body to scrutinise HMRC’s conduct.  The Lords’ report specifically cited the Loan Charge as an example of how HMRC’s approach has shifted from the principles set out in HMRC’s last Powers Review.

The APPG inquiry accuses both HMRC and the Treasury of negligence, and of waging a cynical campaign of misinformation to mislead both the public and Parliament about the nature of the Loan Charge in order to force through what would otherwise have been a highly unpopular policy.  The report claims both the ministerial and civil service codes were broken in the process.  HMRC are also accused of breaching their own vulnerable customer guidelines.

Specific criticism is reserved for Mel Stride, the Treasury Minister in charge of HMRC who has had the unenviable task of defending the policy.

The 89-page report was originally commissioned by MPs to assist the Treasury with an official review into the impact of the Loan Charge that was required by an amendment to this year’s Finance Bill.  The Treasury review was later reduced to the narrowest possible scope and was branded a “sham” and a “whitewash” by MPs.

Contrary to government claims, the APPG inquiry argues that loan schemes had legal basis until the Loan Charge legislation was introduced, an assertion supported by four court rulings against HMRC.  Thus, rather than encoding legal precedent into statute, the Loan Charge in fact allows HMRC to “bypass litigation and to avoid going through the normal legal process when challenging taxpayers”.

The most controversial aspect of the Loan Charge is its quasi-retrospective nature: outstanding loans issued up to 20 years ago, when there was some ambiguity over their tax status even amongst experts and within HMRC, can fall with its scope.  Court rulings and HMRC inaction gave taxpayers the impression that loan arrangements were legal, albeit frowned upon – now they are facing life-changing tax liabilities.

HMRC and the Treasury argue that the Loan Charge is not retrospective because it only targets outstanding loan balances on or after 5th April 2019, and not before.  They further argue that the delayed implementation of the Loan Charge from its announcement has given the public reasonable time to put their affairs in order (typically avoidance legislation has immediate effect).

The APPG inquiry counters these claims by arguing that HMRC usually only have 12 months to investigate tax returns.  Many taxpayers actually flagged loan scheme use on their returns via HMRC’s own avoidance scheme disclosure requirements, and no investigations were opened into the returns.  Other tax returns were investigated but found to be valid and the enquiries closed.  The individuals involved therefore cannot reasonably be expected to regard the Loan Charge as anything other than a retrospective measure: the professional advice received at the time was that loan schemes were valid and HMRC accepted tax returns that explicitly declared loan scheme use – now the Loan Charge seeks to charge tax to historical transactions made in these “closed” tax years.

A generally accepted principle of law-making is that a new rule can’t apply to the past, because it would undermine legal certainty.  However, retrospective law is technically possible in the United Kingdom, although historically it has been used only in exceptional cases, for example to correct errors that resulted from older, poorly drafted laws.

The 20-year historic scope of the Loan Charge by nature has resulted in very large tax liabilities for many people, and the inquiry notes that the stress caused by these life-changing sums has resulted in family breakdowns, taxpayers having to sell their homes and, in some tragic cases, suicides.  However, evidence heard at the inquiry indicated that it was HMRC’s heavy-handed tactics, rather than the amounts themselves, that led to some taxpayers resorting to taking their own life:

“The family witnesses who attended our evidence session were quite clear: the amount of money at issue under the Loan Charge itself was not the overriding factor that led to their relative’s suicide; instead the believed it was the official rhetoric which inferred an intent to commit a crime.”

The APPG report predicts mass bankruptcies as a result of the Loan Charge, in part due to unrealistic payment plans offered by HMRC that charge compound interest over many years, making them even less attractive than voluntary insolvency.

HMRC has made claims in reference to the Loan Charge such as “insolvency is only ever considered as a last resort” and “HMRC does not want to make anyone bankrupt”.  However, their initial impact assessment into the Loan Charge itself said “Some of these individuals will be unable to repay the loans, agree a settlement with HMRC …, or pay the loan charge arising on 5 April 2019.  The government anticipates that some of these individuals will become insolvent as a result.”

Alarmingly, the inquiry also uncovered clandestine use of behavioural psychology techniques by HMRC in order to manipulate the thought processes of taxpayers and “nudge” them towards settling disputes in HMRC’s favour.  This coercive behaviour is thought to have compounded an already stressful situation and was deemed highly inappropriate by the APPG in light of the known suicide risk.

The inquiry’s findings were expected mid-March, but may have been held up by an exchange of correspondence between the inquiry and HMRC chief Sir Jonathan Thompson regarding the Loan Charge suicides: the APPG wanted clarification of the extent of HMRC’s awareness of the suicides but Sir Jonathan couldn’t confirm that HMRC were even aware of any suicides until March 18th, months after both he and HMRC had been warned of a clear suicide risk.

The suicide risk was raised in Parliament by 11 MPs and peers, which the APPG claim is unprecedented for a Government policy, yet the Minister responsible, Mel Stride, failed to acknowledge Loan Charge suicides on each occasion that he was asked about them in the Commons, nor offer his condolences to bereaved families.

The inquiry calls for an immediate six-month delay into the Loan Charge, which took effect on Friday 5th April.  It also calls for an independent inquiry, led by a tax judge with the power to summon witnesses, to decide whether the Loan Charge as a policy is justified and to examine the conduct of HMRC and the Treasury in implementing the policy.

MPs are now petitioning Treasury Minister Mel Stride to suspend the Loan Charge after a Commons debate on it timed to coincide with the publication of the APPG report was “rained off” due to a water leak in the roof of the Commons chamber.  The debate is due to resume on April 11th.

Background to the Loan Charge

The inquiry heard that many people found their way into loan schemes because of the complex regulatory landscape that the IR35 legislation of 2000 had created.  This is important, because the Government’s justifications for the Loan Charge centre around loan schemes being “aggressive tax avoidance”.  The reality, suggests the inquiry, is that the Government’s own ill-conceived IR35 policy gave loan schemes substantive benefits over-and-above the inherent financial rewards: “we have heard from large numbers of risk-averse individuals whose decision to use a loan arrangement was driven primarily by the desire to avoid the complexity and uncertainty of IR35, rather than the avoidance of tax”.

When IR35 was introduced loan schemes did exist, but their use by contractors was largely cost-prohibitive.  The challenging IR35 rules subsequently created a landscape that allowed for the mass-marketing of loan schemes to a sector crying out for “solutions” to IR35: freelance consultants.  HMRC refer to these mass-marketed solutions as “aggressive” avoidance, whereas scheme users argue that a confusing and unfair regulatory landscape created by HMRC’s own rules left them with little choice but to consider such schemes.

Over the following years, alternative tax avoidance loopholes were closed, pushing more and more contractors into loan schemes.  The public sector also began to use increasing amounts of agency staff, who fell within the scope of IR35 and were less inclined to set up Personal Service Companies (PSCs): the inquiry heard that many locum doctors, nurses and social workers were guided into loan schemes by trusted recruitment agents, whilst others were paid through loan schemes without even knowing it.

HMRC estimates the number of individuals affected by the Loan Charge to be around 50,000.  The Loan Charge Action Group (LCAG), a lobby and support group set up by affected taxpayers, estimates the number to be closer to 100,000.

Legality of Loan Schemes

Loan schemes were a problem for HMRC.  In 2002, they had challenged a loan scheme set up for the directors of Phones4U by Ernst & Young, and lost at the Special Commissioners.  The law was subsequently changed, but only to deny a corporation tax deduction for payments made into “employee benefit schemes”, as they were then known – no new income tax charge on loans was brought in.  HMRC appealed the Commissioners’ decision on corporation tax, but didn’t contest the part of the decision that ruled that loans were not taxable.

In 2006, HMRC actually confirmed in writing that loans made by an employee trust were not taxable.  The inquiry saw evidence of written correspondence between HMRC and a loan scheme provider from 2006 that confirms: “loans made by an Employee Benefit Trust (EBT) are not taxable under Sections 173 & 174 Income Tax (Earnings and Pensions) Act 2003”.

HMRC then challenged Sempra Metals, a City of London trading broker, in 2008.  Sempra had also set up a loan scheme for their employees.  Consistent with the ruling in 2002, the Special Commissioners found that payments into their trusts did not constitute a payment of earnings – again defeating HMRC’s argument that the loans should be subject to income tax.

In 2011 – 9 years after the first court ruling on loan schemes – legislation was enacted which attempted to close down loan schemes: the Disguised Remuneration (DR) rules.  The rules were not retrospective.  The DR rules are complex, but failed to become the catch-all provision that they were intended to be: most loan schemes survived, with some requiring a few tweaks to ensure compliance with the new rules.  A General Anti-Abuse Rule (GAAR) introduced in 2013 also failed to stop the proliferation of loan schemes.

At the same time, HMRC had discovered that Rangers FC had been using a loan arrangement to remunerate players and staff at the club.  They attempted to charge tax on the loans, and Rangers appealed to the First-Tier Tribunal.  The (non-unanimous) decision came in October 2012: HMRC had again lost.  On appeal to the Upper Tribunal in 2014, HMRC lost the argument once more.  It was only when they changed their legal rationale, arguing not that the loans were income, but instead that payments by the employer to the trust were earnings, that they won on appeal to the Court of Session (2015), and finally at the Supreme Court (2017).

HMRC & The Treasury have continuously cited the win for HMRC against Rangers at the Supreme Court as setting a precedent that means that all loan schemes have never worked, but, before 2015, the Court had actually sided with the taxpayer on four separate occasions, and never with HMRC.

The Rangers case was also problematic for the Revenue as it placed the tax liability firmly with the employer (i.e. the scheme promoter in most cases), not the recipient of the loan.

Following HMRC’s win in the Rangers case, the Loan Charge was announced: a new tax that would apply to any loan issued as part of an avoidance scheme since 1999.  The tax would take effect in 2019, and would charge tax to all historic loans in one lump sum, in a single tax year.  Tax experts and industry bodies vehemently opposed the Loan Charge, and affected taxpayers formed the LCAG lobby group that would eventually be instrumental in prompting the APPG inquiry.

The inquiry concludes: “the Loan Charge is actually in defiance of the rulings of the Court, and gives HMRC the victory only they believed was due.  Furthermore, if this is a long-standing HMRC position, it is somewhat surprising that it did not communicate this to taxpayers over the almost 20-year period during which these arrangements have existed.

“It is also clear that both HMRC and HMT have deliberately misrepresented the reality of the outcomes of court cases.  No court case has given the legal basis for the Loan Charge.  We are deeply concerned at this cynical and systematic misrepresentation to try to make MPs and journalists believe that court cases have deemed the loans taxable, when that is not the case.”

Criticism of the Loan Charge

The inquiry cites several issues with the Loan Charge itself:

  • The quasi-retrospective nature of the tax undermines the principle of taxpayer certainty, particularly in respect of “closed” tax years
  • Loan schemes were ostensibly untaxable until at least 2011; people who had their tax returns investigated and found to be correct are now facing sizeable tax bills for those same years
  • Compound interest is being charged following years of HMRC inaction, resulting in some cases of effective tax rates of nearly 80%
  • Payment plans charge interest at 1% above the HMRC rate
  • Some tax bills are estimated because the records for the years in question are so old, they have now been disposed of
  • The Loan Charge itself is unnecessary – tax can be collected using existing law – and thus suggests a means for HMRC to bypass litigation and statutory taxpayer protections
  • The charging of multiple years’ loans in a single year, in addition to other income for the 2018-19 tax year, is, according to the inquiry, designed to be a punitive measure intended to make an example of tax avoiders and is at odds with the “fair approach” demanded by HMRC’s charter

“Far from being justified, the Loan Charge rides roughshod over the law and legal process.  In the opinion of the Loan Charge APPG and the Loan Charge inquiry, the Loan Charge undermines the rule of law, a fundamental cornerstone of UK democracy.”

HMRC Failures

The inquiry is highly critical of HMRC, painting a picture of negligence, deception and of a Government agency waging war on a public that it has a putative duty of care over.  The report brands HMRC “unethical”, “shameful”, and “wilfully reckless” – strong language from a cross-party group of MPs that represents about a sixth of the House of Commons.

Arguably the biggest criticism is of HMRC’s failure to act: they accepted many tax returns without opening an enquiry into them; many of the accepted tax returns explicitly disclosed loan scheme use via the Disclosure of Tax Avoidance Schemes (DOTAS) regulations.  In other cases, they opened enquiries with the apparent intention of leaving them open indefinitely until a legal resolution was reached on loan schemes in HMRC’s favour.  They did so without informing taxpayers of their right to request closure of dormant enquiries – an act the APPG inquiry claims was “negligent in their duty of care”.

“By failing to act within reasonable time frames, HMRC is culpable for the accumulation of Loan Charges that are far greater than would otherwise have been the case.”

The report heavily implies that the quasi-retrospective scope of the Loan Charge is intended to allow HMRC a chance to correct past failures – recourse that existing statutory taxpayer protections are designed to prevent.

Given due consideration of the chronology of the legal status of loans, and the fact that HMRC themselves confirmed in 2006 to a loan scheme provider that loans were not subject to income tax, the inquiry disputes HMRC claims that “HMRC has always been clear that these schemes were defective”.

Once Government had resolved to implement the Loan Charge, posits the inquiry, it embarked on a campaign of misinformation, misrepresenting previous decisions in the Court to establish a legal justification and playing down the impact the policy was to have on the public.

Most Government policy – particularly financial legislation – is subject to a consultation phase whereby the draft legislation is released for comment by industry, professional bodies and the public at large.  The APPG inquiry notes that 90% of responses to the Loan Charge consultation were negative, yet were subsequently ignored by lawmakers.

The Institute of Chartered Accountants in England and Wales (ICAEW) were highly critical of the Loan Charge proposals.  Their consultation response said that the policy:

  • “contravenes generally accepted notions of fairness and breaks the constitutional convention against retrospective legislation, imposing tax charges in cases where taxpayers already had legal certainty that none were due,
  • “is at variance with HMRC’s arguments in many court cases (successful to date) that monies paid via employee benefit trusts (EBTs) and employer funded retirement benefit schemes (EFRBS) were actually earnings that should have been subject to PAYE and NIC,
  • “are aggressively retroactive against taxpayers who have not done anything that would under current rules leave themselves open to a 20 year assessing window which currently requires HMRC to demonstrate that there has been a deliberate inaccuracy in a return, especially as HMRC has been aware of loans to employees since at least 1999 and has failed to open inquiries or raise assessments before the expiry of statutory deadlines,
  • “affects transactions which were entered into up to 17 years ago where HMRC has taken no timeous action despite knowledge of the alleged avoidance and so is likely to lay the proposed legislation open to challenges under the Human Rights Act,
  • “contrasts with the favourable terms given to so-called tax evaders under the former Liechtenstein Disclosure Facility even though the taxpayers disclosed the loans at the time, and
  • “is unnecessary given that many of the outstanding cases are covered by existing legislation, in particular the s554A gateway which could be applied instead of HMRC proposing new legislation.”

In addition to ignoring recommendations, HMRC actually tried to suggest that the 90% negative responses were mainly from disgruntled affected taxpayers, and the 10% positive responses were from “accountants, tax advisors and representative bodies”.  To ignore the consultation responses not only undermines the consultation process, but is extremely discourteous to the tax professionals that took the time and effort to provide highly technical responses, in good faith and gratuitously.

The official HMRC impact assessment, issued to MPs and peers when debating and voting on the legislation, hugely played down the anticipated impact of the policy and was “seriously flawed to the point of being negligent”, says the report.

Having succeeded in getting the law through Parliament, HMRC’s errors continued.  Communication with affected taxpayers was erratic or non-existent, despite the DOTAS regime providing HMRC with the requisite information.  Some individuals only received notice of their liability under the Loan Charge as late as September 2018.  Others received nothing.

A “settlement opportunity” launched by HMRC required taxpayers to sign legal declarations assuming culpability for the non-payment of tax, waive their right to any refund under common law and check a tickbox declaring “I have now stopped using tax avoidance schemes and I do not intend to use any in the future”.

The settlement opportunity offered no discount on the tax liability and essentially asked taxpayers to offer payment voluntarily, but was claimed as the only way to spread the bill.  However, payment plans were charged at a premium rate of interest – 1% higher than the HMRC rate – exacerbating an already substantial liability and, claims the APPG inquiry, making voluntary insolvency more attractive for many, despite HMRC claims that “insolvency is only ever considered as a last resort” and “HMRC does not want to make anyone bankrupt”.  Some settlements seen by the inquiry also include charges to inheritance tax, which is incompatible with a simultaneous charge to income tax.

The inquiry also heard reports that taxpayers had been told by HMRC officials to take out personal loans to pay their loan charge liability, and were advised by HMRC not to tell the lender that the loan was to pay tax bills, because most lenders would then refuse credit.  The APPG has written to the Financial Conduct Authority (FCA) to determine if this practice abides by FCA rules.

HMRC assured Parliament that they were capable of handling the volume of settlement administration, but anecdotal evidence submitted to the APPG inquiry suggests that it failed to do so: an initial deadline of March 2018 was dropped, a deadline of September 2018 was subsequently imposed; many individuals that submitted information by the September deadline were still awaiting their calculations at the date of the APPG report; after failing to meet its deadlines, HMRC later made a commitment to honour any settlement request received before the end of the financial year.

The report notes the strict deadlines HMRC imposes upon taxpayers, whilst observing the tax authority’s failure to meet its own deadlines in Loan Charge settlement cases.

The settlement opportunity itself appears to be the product of an esoteric behavioural psychology experiment within HMRC that is designed to “push” taxpayers towards volunteering payment.  The inquiry saw rhetorical correspondence from HMRC, including one letter that said: “Thank you for asking to pay the amount above [£62,591.69] by instalments.  Unfortunately…I’m unable to agree to your payment proposal…You must pay in full immediately.  If you don’t, pay in full I’ll take control of your goods.”

The APPG heard evidence of strategies within HMRC with names like “Doves and Hawks”, “Punishment Strategy” and “Make It Real”: a disturbing insight into the tax authority’s current attitude towards tax enforcement, and the public in general.

Effect on the Public

Such strategies may be behind APPG inquiry reports that “many people … described HMRC’s conduct as bullying”.

Ignoring the recommendations of professional bodies such as the Chartered Institute of Taxation (CIOT) and Institute of Chartered Accountants in England and Wales (ICAEW), the Loan Charge became law in 2017 and the clock started ticking on crippling potential liabilities due in April 2019.

HMRC and the Treasury were warned by the Loan Charge Action Group (LCAG) of a suicide risk, as reported by The Evening Standard in June 2018.  The APPG inquiry notes that the matter was also raised in Parliament in June 2018.  The LCAG then wrote to HMRC chief executive Sir Jonathan Thompson in June 2018 requesting a 24-hour helpline for those at risk of suicide.

The response from an HMRC official merely encouraged taxpayers to contact HMRC to make good their tax affairs.

Tragically, the inquiry reports that during their hearings in February 2019, they were made aware of at least three suicides of taxpayers facing the Loan Charge.  An unconfirmed leak to the inquiry from an HMRC whistleblower claimed that HMRC were aware for up to six suicides.  An anonymous online survey by the APPG of 1,768 individuals earlier this year indicated that 40% of respondents said that they had seriously considered suicide, and 60 individuals made direct or implied statements that they intended to end their lives.  One taxpayer submitted evidence to the inquiry that they had tried to “walk under a Range Rover” at Christmas in 2017; another told the APPG “my only option now is to starve myself to death”.

The suicide risk was raised in Parliament by 11 MPs and peers, which the inquiry claims is unprecedented for a government policy.  When asked in the Commons, the Minister in charge of HMRC, Mel Stride, failed to acknowledge the reports of suicides, nor did he offer his condolences to the affected families.

The inquiry also warns that the Loan Charge is likely to result in mass bankruptcies and family breakdowns, contrary to claims in the official impact assessment that the tax “is not expected to have a material impact on family formation, stability or breakdown”.

“There is a clear risk to the mental welfare of people facing the Loan Charge, including a known suicide risk.  This has to date been ignored by the Treasury and HMRC.  There have already been suicides of people facing the Loan Charge, including one acknowledged by HMRC.  We believe that HMRC’s failure to set up a proper 24-hour counselling helpline, knowing the clear suicide risk of people facing the Loan Charge, was negligent.”

Taking it in his Stride

Chancellor of the Exchequer Philip Hammond has, on occasion, defended the Loan Charge policy – but since putting his foot in it on the Andrew Marr show last autumn, where he referred to loan schemes as “illegal tax avoidance” (an oxymoron), and also describing the arrangements as “tax evasion” to the Treasury Select Committee, for which he later had to issue an official retraction, he has remained oddly quiet on the matter.

As such, the unenviable task of defending the policy has fallen squarely on the shoulders of the Minister in charge of HMRC: Financial Secretary to the Treasury and Paymaster General, Mel Stride.

The APPG inquiry is so critical of Mr Stride that it accuses him of breaking the Ministerial Code.  Here is a summary of their criticisms of the Minister:

  • Misled Parliament on at least five separate occasions as to the legal basis of the Loan Charge
  • Claimed in Treasury Questions “the arrangements…were not legal when they were entered into” and has made similar bogus comments on the record, but, unlike Philip Hammond, has not retracted them
  • Has been sent hundreds of written Parliamentary Questions by MPs regarding the Loan Charge and repeatedly gives template answers that only partially, or completely fail, to answer the question posed
  • Ignored a question from Stephen Lloyd MP in the Commons calling for a dedicated HMRC Loan Charge helpline
  • Misrepresented a series of unconnected HMRC convictions as evidence that HMRC are pursuing loan scheme promoters, both in the Commons and on Radio 4’s Money Box, a claim later found to be untrue via an FOI request (the inquiry believes HMRC are pursuing individual taxpayers rather than scheme promoters as they are easier targets)
  • His answers and demeanour on Money Box heavily suggested that he knew “full well” that the convictions had nothing to do with the Loan Charge, but he continued to entertain the notion nonetheless
  • His claims in Parliament that loan schemes “have always been found to be defective and not to work” by the Court are demonstrably untrue
  • Failed to offer his condolences to the families of individuals who have taken their own lives as a direct result of the Loan Charge, or even acknowledge the suicides when asked about them in the Commons
  • Declined to give oral evidence at the APPG inquiry
  • Refused four times to appear before the House of Lords Economic Affairs Committee to discuss the Loan Charge
  • “Has demonstrated a complete and arrogant disregard for accountability and for Parliamentary scrutiny”

Mr Stride, who made his fortune in the exhibition trade before becoming an MP, maintains that the Loan Charge is necessary to sustain a fair tax system.  In an interview with the Financial Times on 31st March, he said: “I’m satisfied that HMRC are taking a proportionate and fair and reasonable approach to this … For everybody who avoids tax, there’s somebody else who has to pay it, or there’s a public service, like our police and our nurses and doctors and schoolteachers, who have less money to provide those public services.

“So I think at the heart of this, there’s a strong principle of fairness.”

The APPG inquiry claims: “By failing to answer questions honestly in the House of Commons; we believe the Minister has now breached the Ministerial Code.  The Minister must be held accountable for this breach and should also be investigated for the appalling obfuscation by HMRC information [sic] pertaining to the Loan Charge more broadly”.

Allegations of breaches of the Ministerial Code are usually investigated by the Cabinet Office or the Prime Minister.  Stride may be helped by the fact that Brexit has all but exhausted the Conservative Party’s substitute bench: as of 2019, 21 Ministers had already resigned from government.  Amber Rudd resigned as Home Secretary last year after misleading the Home Affairs Select Committee over the Windrush Scandal – she was subsequently reinstated as Secretary of State for Work and Pensions six months later.


The APPG inquiry is unequivocal in its criticism of the Loan Charge, and calls for a delay to its implementation in order for an independent inquiry, headed by a tax judge, to review its merit and proportionality.

This may prove difficult given the publication of the inquiry’s report two days before the Loan Charge took effect.

But in investigating this unpopular tax, the cross-party committee of MPs has uncovered darker truths about the relationship between the Treasury and HMRC which it believes need review.

Under the status quo, the Treasury is responsible for the conduct of HMRC, which critics argue amounts to a conflict of interest.  HMRC contributes substantially to the Treasury.  There is, under the current system, a risk that the Treasury may turn a blind eye to certain HMRC misdemeanours if they represent increased revenue for the Treasury.

The Loan Charge exemplifies this potential conflict of interest.  The Loan Charge represents a boost of £3.2 billion to the public purse, but critics argue it defies the rule of law.  The Treasury and HMRC have acted in unison supporting the policy.  Ministers within the Treasury appear to have been misled into believing the Loan Charge targets “illegal” arrangements by their own civil servants, to the extent that they erroneously declare them as such in Parliament and in the media, later having to retract their comments.

Before the Loan Charge APPG was even formed, this year’s Finance Bill was debated in the House of Lords.  The Lords Economic Affairs Committee was flooded with correspondence from taxpayers facing the Loan Charge.  The Committee expressed strong concerns that HMRC were acting beyond their remit, recommending a fresh review of HMRC’s powers and suggesting the consideration of the establishment of an independent regulatory body to police HMRC.

The APPG inquiry’s main findings are:

  • There is a clear risk to the mental welfare of people facing the Loan Charge, including a demonstrable suicide risk
  • HMRC’s failure to set up a proper 24-hour counselling helpline after being warned by MPs and the public of the risk to affected taxpayers’ wellbeing was negligent
  • Despite HMRC and the Treasury’s repeated commitments of not wanting to make anyone bankrupt, the Loan Charge will result in mass bankruptcies, either out of necessity, or voluntarily in order to avoid the crippling Time-To-Pay payment plans offered by HMRC
  • Some people will be forced to sell their homes or already have, contrary to HMRC claims that no one will be forced to sell their homes
  • Families have broken up due to the pressure of the Loan Charge and many more face breakdown, despite HMRC’s impact assessment claiming that the Loan Charge would have no effect on family stability
  • People who are retired or near retirement will have their lives ruined by the Loan Charge
  • The initial impact assessment on the Loan Charge, used by MPs when debating and voting on the measure, was inadequate and flawed to the point of negligence – the APPG strongly suspect that facts and obvious consequences were omitted to mislead Parliament
  • 90% of consultation responses were ignored, including responses from all professional bodies – including the ICAEW and CIOT
  • The Treasury and HMRC have ducked proper scrutiny and evaded answering key questions
  • HMRC actually hired contractors who were using loan schemes, albeit unwittingly
  • Loan Charge arrangements were not entered into as “aggressive tax avoidance”:
    • Many scheme users took professional advice upon entering into loan arrangements and were advised, correctly in the opinion of the APPG, that they were legal at the time that they were entered into
    • Substantial numbers of scheme users did not even know they were signing up to loan schemes, particularly in the public sector, due to lack of understanding of the regulatory landscape
    • The vast majority of people entered into loan schemes not to pay less tax, but to avoid the complex IR35 legislation and administrative burden of working through a limited company
  • HMRC are pursuing people for closed tax years, contrary to the extent of their powers in the Taxes Management Act 1970 and wider accepted principles of fair tax law
  • HMRC have failed to open investigations into tax returns that explicitly declared loan scheme use via the DOTAS regime
  • DOTAS – as it applies to the Loan Charge – is not fit for purpose
  • In some cases, HMRC opened investigations into tax returns of scheme users only to close them having found no wrongdoing, and those years are now subject to the Loan Charge
  • Some tax bills are estimated because the records of the years in question have been disposed of
  • The Loan Charge was introduced to bypass the normal legal processes and to allow HMRC to collect tax where they have failed to do their job
  • HMRC’s own statements suggest a motivation behind the Loan Charge was to bypass the legal process and avoid the “need to litigate”, denying taxpayers the right to challenge HMRC’s claims and the right to due process, which the APPG say is “wholly wrong and a very worrying precedent”
  • Many people were given wholly inadequate notice of the Loan Charge, in some cases only 7 months or less
  • HMRC have opened investigations into individuals’ tax returns and then left them open with no action for years or decades (HMRC has a year to open an enquiry into a tax return but there is no limit on the length of the enquiry after that), accruing unnecessary interest on taxpayers’ accounts
  • HMRC has failed to deal with vulnerable individuals and has in some cases breached their own vulnerable customer guidelines – “bullying”
  • The Treasury and HMRC have engaged in a cynical campaign of misinformation to seek to justify the Loan Charge and have failed to answer questions openly and honestly
  • Ministers have tried to claim that HMRC convictions were related to loan scheme promoters when in fact HMRC’s own reply to an FOI request states “there are no criminal offenses specific to the promotion of mass marketed tax avoidance schemes”
  • The APPG’s view is that it is impossible to trust anything the Treasury or HMRC say with regard to the Loan Charge
  • The inquiry has concluded that the lack of integrity shown by HMRC officials constitutes a breach of the Civil Service Code
  • The inquiry has concluded that Mel Stride has broken the Ministerial Code

The inquiry recommends an immediate six-month delay into the Loan Charge, to allow for an independent inquiry led by a tax judge to review its merit and fairness.

They also recommend the following amendments to the tax:

  • Deadline for submission of accounts for Loan Charge calculation to be moved to September 2019
  • Payment of Loan Charge demands to fall on 31st January 2020
  • Suspension of settlement cases pending independent inquiry
  • Removal of closed tax years from scope of charge entirely
  • Right of appeal to be reinstated
  • Settlement to be offered at flat rate of 10% of loan balance for open/protected tax years
  • No late payment interest to be applied to tax from 2015-16 or before
  • Automatic ten-year payment plans for all affected taxpayers
  • Urgent creation of a 24-hour counselling helpline for taxpayers facing the Loan Charge or Accelerated Payment Notices (APNs)
  • A full and proper independent review into the Loan Charge, led by a tax judge with powers to summon witnesses, with the goals being:
    • Decide if the Loan Charge is justified as a policy or whether HMRC already have sufficient powers to deal with disguised remuneration
    • Assess the impact of the Loan Charge on individuals facing it and their families
    • Examine the conduct of HMRC and the Treasury in respect of the Loan Charge implementation
    • Consider changes to the Loan Charge legislation as necessary
    • Make recommendations about wider reform of HMRC and its powers
  • An investigation into HMRC’s “flawed and misleading” Loan Charge impact assessment

The Chair of the Loan Charge APPG, Sir Ed Davey, commenting on the inquiry’s report said: “Our Inquiry demonstrates the devastating consequences of this draconian policy.  The lives of thousands of individuals and their families are being damaged by this retrospective tax, that itself breaches the rule of law.  Our report concludes the Loan Charge was brought in to cover up HMRC’s own failures.

“Prior to the Loan Charge Inquiry there was little evidence about the reality of the Loan Charge.  Now the evidence exists there is clear risk of harm to people.  The Government must do the only responsible thing and delay the Loan Charge and announce an independent review into it.”

Ruth Cadbury, Vice-Chair of the Loan Charge APPG said: “The Loan Charge Inquiry received over 900 submissions as well as holding two oral evidence sessions.  The evidence we have received clearly exposes the reality of the Loan Charge and the damage it will do to people and how different this is from the false picture being painted by HMRC and the Treasury.

“The callous and cynical way that Ministers and HMRC have sought to mislead people is a disgrace and something that in itself needs a proper investigation.  Knowing the serious risk to people, the Government must now announce an immediate suspension of the Loan Charge and any settlement discussions and a proper and independent review into the dreadfully ill-considered and deliberately mispresented policy.”

Ross Thomson MP, also Vice-Chair of the APPG, said: “The All-Party Parliamentary Loan Charge Group wish to thank the hundreds of people who sent evidence to the Loan Charge Inquiry.  This is evidence that HMRC and the Treasury should have gathered and considered to show the real impact of the policy.  Now this evidence and the Loan Charge Inquiry report is in the public domain, the only responsible thing to do is to immediately suspend the Loan Charge and announce an independent review.  With lives at risk and with suicides already confirmed, this is the only responsible thing to do and I urge MPs to support our motion on Thursday to do this.”

Whilst having no legal effect, the APPG report is unlikely to be ignored.  The APPG’s membership is now at 120 MPs across nearly all of the Westminster political parties.  A debate in the Commons was scheduled for the day after the publication of the inquiry’s report but was cut short due to a water leak.  MPs are now petitioning Mel Stride for suspension to the Loan Charge.  The Commons debate is due to resume on Thursday April 11th.

Billions of pounds, and thousands of British citizens’ rights to due process, are at stake.  The reaction of Philip Hammond’s Treasury to the report will be of great interest to many.

9th April 2019.