HMRC’s conduct in the loan charge scandal has had a huge effect on individuals. The loan charge is a retrospective tax on people who signed up to Disguised Remuneration (DR) schemes. DR is a financial arrangement that allows people to avoid paying tax and national insurance by taking their salary in the form of a loan, rather than being paid in the usual way.
Sounds dodgy? Yes, it does a bit. His Majesty’s Revenue and Customs (HMRC) says it has never approved these schemes and this view was reinforced in 2017 when the Supreme Court found in favour of HMRC against Rangers Football Club.
However, thousands of people were persuaded (and sometimes forced) to sign up, either by their employer or by promoters who were on commission. An obvious comparator is the useless endowment mortgages that were effectively forced on the public in the 1980s and 1990s.
HMRC bites back
To neutralise these schemes, the government introduced the loan charge in 2019. It works by adding together all of someone’s outstanding DR loans and taxing them as income in one single tax year, 2018-19. It is effectively a 45 per cent non-refundable charge on all employment-related loans made since 1999, and was to be paid by January 2020.
The end result for many was a huge and unpayable debt to HMRC.
The loan charge penalises the ordinary individuals who acted in good faith based on professional advice. Critics argue, in addition, that its retrospective nature is unfair. Many were not aware of the potential consequences or the retrospective nature of the charge, have suffered financial distress and even bankruptcy or physical harm. HMRC has reported that there have been 10 suicides, 13 attempted suicides and 24 serious injuries from self-harm.
The controversy sparked a debate in the House Of Commons which called for the reform of tax legislation and enforcement practices.
HMRC unfettered authority
Case law confirms that HMRC has a “wide managerial discretion as to the best means of obtaining for the National Exchequer from the taxes committed to their charge the highest net return that is practicable having regard to the staff available to them and the cost of collection”.
In other words, HMRC should raise as much money as possible and it can decide how best to go about it, without intervention from the courts. It seems to have unfettered authority coupled with zero accountability.
Such wide managerial discretion is presumably intended to ensure efficient tax collection and revenue optimisation. But this reasonable aim must be balanced with considerations of fairness, taxpayer rights and the broader impact on compliance culture and taxpayer trust. Failure to do so will result in unintended consequences and could undermine the integrity and effectiveness of the tax system.
All Party Parliamentary Group (APPG)
The increasing concern about the fairness of HMRC’s behaviour and its subsequent impact on taxpayers led to the formation of an All Party Parliamentary Group (APPG) and in June 2019, the group released a damning report. The group identified a number of key themes that could be observed in taxpayers’ interactions with HMRC.
Whatever means necessary
The report gives multiple examples of HMRC demanding sums of money from people that are wholly unaffordable. These include a demand of more than £3000 per month from someone whose net income is £2000 per month and another demand of more than £6000 per month from somebody who has no source of income at all.
When people – or even HMRC officers – point out the impossible nature of these demands, HMRC simply says that if people don’t pay, they will be subject to penalties.
The report calls HMRC’s conduct in pursuit of the Loan Charge “out of control and focused solely on an objective of maximising revenue collected, by whatever means necessary.”
Bullying and coercion
This ‘any means necessary’ attitude leads to adversarial, even threatening communication from HMRC to individuals. Examples of bullying and coercion are scattered throughout the APPG report. Threats to initiate bankruptcy proceedings are “worryingly” common.
HMRC’s charter specifies that officers assume all individuals are acting honestly. The report notes that “HMRC often communicate with individuals in a manner that falls far short of this expectation.”
This feels like wry understatement when you read some of the individual accounts written by taxpayers who have done nothing wrong.
Persistent aggression from HMRC does nothing to improve the ability of people to pay these sometimes vast sums. On the contrary, people’s cooperation and compliance is undermined at every turn.
Acting outside the law
Wide managerial discretion is one thing but the APPG found examples of HMRC acting outside the law, by requesting information from taxpayers that they are not permitted to request. One HMRC officer requested a copy of a taxpayer’s mortgage application, a request which falls outside the statutory records required under the Taxes Management Act of 1970.
In other cases, HMRC told people that they should attempt to take out loans to pay HMRC’s demands. This also is not permitted.
HMRC reform needed
Repeated draconian demands for impossible payments, bullying, coercion and unlawful demands for information and scrutiny can have only a negative effect on the thousands of people subject to the loan charge. The multiple cases of suicide, attempted suicide and self-harm attest to the distress and hopelessness that is the inevitable result. The report’s conclusion points to the “total disconnect” between what HMRC says it does and the reality that it inflicts upon taxpayers.
It is imperative to reflect on the perils of unchecked authority, and indeed this was discussed at length in the loan charge debate in the House of Commons in January of this year. As Gregory Smith, Conservative MP for Buckingham said, “How can […] HRMC be autonomous in being judge, jury and executioner at the same time?”
As the fallout of this scandal piles up, it is clear that restoring trust in the government and tax system requires not only addressing the immediate injustices but also implementing robust measures to ensure accountability and oversight in the exercise of authority.
Only then can we stop this happening again.
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