They have called for a change of leadership within HMRC to restore trust among the public and parliamentarians, along with suspension of the loan charge – which is due to come into operation tomorrow – and the establishment of an independent review led by an experienced tax judge.
In its 91-page report on the loan charge scandal, the All-Party Parliamentary Loan Charge Group (APPG) described the Treasury’s original impact assessment of the charge as “flawed and inadequate, to the point of being negligent”, adding that it clearly represents a risk to the mental welfare of people caught up in it, many of whom face bankruptcy.
“Our inquiry demonstrated the devastating consequences of this draconian policy,” said APPG chair Sir Ed Davey. “The lives of thousands of individuals and their families are being damaged by this retrospective tax, that itself breaches the rule of law.
“Prior to the loan charge inquiry, there was little evidence about the reality of the loan charge. Now the evidence exists, there is a 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.”
The problem dates back to the late 1990s and early 2000s when thousands of self-employed contractors, council workers, nurses, social workers and other public sector employees were advised by accountancy firms, employers or recruitment companies to use what are now known as “disguised remuneration” (DR) schemes. Their salaries were paid into trusts, often offshore, which then returned their money to them in the form of loans, so avoiding tax.
Although HMRC did not pursue users at the time, it recently started sending out tax bills to scheme users demanding thousands of pounds, in some cases clawing back tax from 20 years ago.
According to evidence given to the APPG, many only received tax demands in late 2018 or early 2019, just months before the loan charge was due to come into effect.
DR schemes were banned in 2011, but it was the 2017 Finance Act which enabled HMRC to take retrospective action. It brought into charge to income tax the value of all loans made through DR schemes on or after 6 April 1999 which are outstanding tomorrow.
Any taxpayer who fails to agree to pay the outstanding tax by tomorrow, will be forced to pay the penalty on top of their tax bill.
The APPG report says that the real reason behind the loan charge was “to bypass normal legal processes and allow HMRC to collect tax where they failed to do their job”.
This, it argues, is particularly unfair because most of the people who used DR arrangements did not do so for aggressive tax avoidance reasons but because of the IR 35 legislation and the administrative burden of running a limited company.
Most of those who knowingly used DR schemes did so after being assured by professional tax advisers that they were legal and approved. However, many more were employees in the public sector and were not aware that their pay arrangements involved loans.
In drafting its report, the APPG drew on more than 900 submissions sent in following a call for evidence in February. It also received 1,768 replies to an independent survey of individuals impacted by the loan charge, and heard oral evidence from tax advisers, accountants and a tax lawyer as well as from taxpayers involved.
A key finding is that the loan charge overrides taxpayer protections and undermines the rule of law.
The APPG says that HMRC is pursuing people for tax relating to closed tax years, including taxpayers who have no open tax enquiries for any tax year. In some of the cases, HMRC did not open enquiries in the “permitted time window” while in others it opened an enquiry, then closed it because it was satisfied and is now claiming the relevant tax return was not acceptable.
The APPG’s evidence revealed that many of the taxpayers were unable to pay the tax bills and were having to sell their homes or facing bankruptcy. Families had broken up under the pressure and yet, it said, HMRC’s impact assessment claimed there would be no effect on family stability.
The APPG accused HMRC of failing to deal with the threat to vulnerable individuals and, in some cases, of breaching their own vulnerable customer guidelines. It had also failed to react to the known suicide risk.
Indeed, this week HMRC revealed that it had referred itself to its oversight body over the suicide of a taxpayer known to have used DR arrangements.
The House of Commons will be debating a motion on the loan charge today which being brought by the APPG. The issue will no doubt get an airing in the House of Lords as well as it is currently debating a report on HMRC’s powers and fair treatment of taxpayers.