Julia Irvine 27 Mar 2019 03:27pm

Loan charge review is a “sham”, say MPs

MPs have described the Treasury’s review of the loan charge as a “cynical and misleading attempt at self-justification” about a fundamentally “unjust” policy

The All-Party Parliamentary Loan Charge Group (APPG) yesterday accused the government department of acting in bad faith in not carrying out a “genuine” review. Instead, it has chosen merely to update the same “misleading documents” that were already in circulation.

“The Treasury report fails to deal adequately with the widely-held view that the loan charge represents a change in the tax law for past years – and offends against the rule of law,” said APPG chair Sir Ed Davey.

“The loan charge is retrospective in many aspects and sets a dangerous precedent as an attack on long-standing taxpayer protections.”

He added that the review was not what MPs had expected, nor indeed what prime minister Theresa May had promised. The Treasury and HMRC had not called for evidence externally and had disregarded the APPG’s own evidence “for spurious reasons”.

The controversial loan charge, which will be implemented next week, is targeted at up to 50,000 taxpayers who used so-called disguised remuneration (DR) schemes predominantly during the 1990s and 2000s. Under the schemes, individuals were paid indirectly through the use of loans from third parties.

Although (DR) schemes were legal at the time, a change in legislation in 2017 has enabled HMRC to go back for up to 20 years in some cases and demand additional tax to be paid for periods that include “closed” tax years (where HMRC failed to flag any concerns at the time and was time-barred from challenging tax returns).

As a result, taxpayers, including social workers and nurses, who were persuaded by their employers to use the schemes, are facing tax demands amounting to thousands of pounds, which they cannot afford to pay. Many are facing financial ruin and at least one individual has committed suicide.

Under the loan charge, all outstanding loans will be added together and taxed as income in one year. Taxpayers who have already paid or reached a payment agreement with HMRC will not be caught by it.

The APPG, which wants the charge abolished, says that the Treasury’s refusal to delay its implementation is “disgraceful”.

“About the only bits of this ‘report’ that are worth reading are the bits where it is acknowledged that the loan charge has been brought in so that HMRC can demand disputed liabilities from people without them having the right to appeal, plus the veiled admission that they did indeed fail to open enquiries and are now demanding tax for closed tax years,” said APPG vice chair Ross Thomson.

“Not only does this show the reality of the motivation for the loan charge, to wipe away taxpayers’ basic rights to appeal, but it also proves that the loan charge is retrospective: to try to pretend otherwise is as nonsensical as it is dishonest.”

The APPG is particularly incensed by the “downright lie” in the Treasury report that, despite a clear commitment to do so, the group had failed “sufficiently” to provide HMRC with taxpayer submissions raising personal tax issues relating to the loan charge.

It says that it sent 70 submissions to Ruth Stanier, HMRC’s director general customer strategy and tax design, after receiving permission from the taxpayers to have their cases shared with HMRC. It expected HMRC to write back to the APPG about each individual case, but has received nothing. This, it added, was more evidence of bad faith.

Yesterday’s Treasury report made it clear that the government would be sticking to its guns and implementing the charge on schedule.

Treasury financial secretary Mel Stride described DR schemes as “an aggressive and contrived form of tax avoidance” that most people wouldn’t go near. “Many contractors,” he added, “looked at these arrangements, were appalled and ran a mile.”

The report pointed out that HMRC is aware how stressful it is for taxpayers facing large tax bills. It reiterated that HMRC is prepared to deal with them “sympathetically” and will not require them to sell their main home to pay the debt.

HMRC is also running a dedicated helpline, alongside a team providing extra support for taxpayers identified as vulnerable.

The government expects to claw back an extra £3.2bn from the DR scheme debacle over the coming five years, of which 75% will come from employers rather than individual taxpayers.

So far, HMRC has settled some 6,000 cases, receiving around £1bn of which 85% has come from employers.

HMRC also warned yesterday about contractor arrangements currently being marketed which claim to avoid the 2019 loan charge by transferring ownership of shares in a personal service company (PSC).

“HMRC’s strong view is that these arrangements or similar ones do not work and we will tackle the promoters and users of these arrangements,” it said.

It added that anyone using the arrangements would still face the loan charge plus, potentially, an additional significant penalty.