Treasury forced to review 2019 Loan Charge
MPs were successful in forcing an amendment to the Finance Bill on Tuesday that compels the Treasury to review the controversial 2019 Loan Charge by the end of March.
The 2019 Loan Charge was introduced at the 2017 budget but doesn’t take effect until 6th April of this year. It is designed to tackle “disguised remuneration” tax avoidance schemes which remit funds to users in the form of loans made via intermediaries (typically offshore) instead of salary payments. These loans were designed to exist in perpetuity, such that scheme users accumulate more loan liability the more that they use the scheme.
Whilst not technically a retrospective law because it only charges loan balances that exist on or after the date that it takes effect, many affected individuals argue that it does have retrospective effect – at the time they used the schemes there was case law to support their validity, the advice received was that they were legal and many users actually declared their use on their tax returns under the DOTAS regime, with the tax returns being accepted by HMRC without further enquiry.
The Government argue that the schemes never worked and point to the Supreme Court’s decision in the Rangers FC case to support their assertion. The Loan Charge legislation sets a 20 year limit so that any loans issued before April 1999 will not be subject to a tax charge.
The Finance Bill amendment, tabled by Lib Dem MP Sir Edward Davey, adds new clause 26 to the bill, which seeks to draw a comparison between the Loan Charge and other proposals contained in this year’s bill which will increase the amount of time that HMRC have to investigate offshore “matters or transfers” to twelve years from the current four to six year limit. The amendment places an obligation upon the Chancellor of the Exchequer to report to the House of Commons by 30th March on the effect of these proposed changes, including a “comparison … with other time limits on proceedings for the recovery of lost tax, including, but not limited to, those provided for by [the Loan Charge provisions]”.
The clear intention is to highlight a seemingly inconsistent approach – twenty years for the Loan Charge but twelve for other offshore matters – which could then provide a justification to request adjustments to the Loan Charge’s scope. The amendment is also expected to show that the test of reasonableness contained within the new offshore proposals, if applied to the Loan Charge, would itself prevent any retrospective tax collection.
Accepting the amendment, which was widely seen to have the support of the House, Financial Secretary to the Treasury, Mel Stride, said: “the Government of course remain committed to setting out the rationale for their policies as well as their impact, and in that spirit we will not oppose the new clause. It is absolutely right that, when HMRC deals with the public, it has a strict duty of care, a duty of proportionality and a duty to be as sympathetic as it can be relevant to the circumstances of those with whom it is dealing. In my dealings with HMRC, I have made those points forcefully clear. As the right hon. Gentleman will know, HMRC has recently come forward to say that those earning £50,000 or less—which is over twice the average national salary of somebody working in our country—will automatically be granted, without requirement for additional paperwork, a minimum of five years’ time to pay as an arrangement to settle their affairs. Of course for those who come forward before April there is effectively in most cases no penalty as such; they will simply be required to pay that tax which was due in the past—and it was always due in the past—plus the interest that is rightly applied.”
Debating the amendment provided MPs with a forum to discuss some interesting anecdotes from their constituents regarding the loan charge: Tory MP for St Albans, Anne Main, described a constituent working in FinTech that is being pursued for £900,000 by HMRC for the Loan Charge. He tried to settle with HMRC for £700,000 but was refused. She said both he and his family are under considerable stress as a result. Bambos Charalambous, Labour MP for Enfield Southgate, said the Loan Charge Action Group (LCAG) had informed him of suicides, bankruptcies and relationship breakdowns as a result of the legislation.
Nicky Morgan, Chair of the Treasury Committee, said: “tax law sets out time limits within which HMRC can open inquiries and make tax assessments. Normally, those time limits take account of whether a taxpayer has taken reasonable care to comply with their tax obligations, has been careless or has deliberately decided not to comply. They are seen as valuable taxpayer protections, giving a degree of certainty that takes appropriate account of taxpayer behaviour. It is certainly concerning to me … that HMRC’s contractor loan settlement opportunity requires people who want to put their affairs straight to waive those protections, with the threat of the loan charge looming over them.”
Anneliese Dodds called the Loan Charge “deeply unfair”, whilst Sir Edward Davey went even further: “It has caused misery. It has affected people’s lives, their health, their families. It has caused gross misery.
“Let me remind the House why the Treasury should, after the review, ditch the retrospective nature of this measure, delay April’s implementation and amend the charge so it focuses only on payments made after 2016. It is because the loan charge, as introduced, offends against the rule of law. It is the sort of taxation that led the barons to rebel against King John and gave birth to Magna Carta. It is simply not acceptable for a Government to introduce a law that makes illegal something someone did years ago, when that action was considered legal. That is a clear principle.”
10th January 2019.
Sources:
https://www.accountancydaily.co/treasury-review-2019-loan-charge
