The loan charge is retrospective legislation introduced in the 2016 Finance Act to tackle tax avoidance via disguised remuneration schemes. The users of these schemes, mainly the self-employed, were paid in the form of loans via loan remuneration agreements (LRAs) which replaced a portion of their salary.
The loans were made normally through an umbrella company or other third party (for example an employee benefit trust). The loans were structured so that, for the majority, they were unlikely to be paid back. Loan proceeds, unlike salary, are not normally income, and therefore are not subject to income tax or national insurance.
Prior to the loan charge, these LRAs were considered to be legal, even though His Majesty’s Revenue and Customs (HMRC) did not like them. The loan charge changed the legislation retrospectively, going back many years, meaning those who had been sold these schemes suddenly faced demands for life changing sums of money.
This story has attracted significant attention following the ITV series Mr Bates vs The Post Office and news that Lady Michelle Mone’s husband Doug Barrowman is linked to AML Tax UK Ltd, one of the largest companies promoting LRA schemes. Recently, these schemes were debated in parliament.
The victims impacted by the loan charge
Like the Post Office scandal, ordinary people are the most seriously affected. The victims believe HMRC have acted without compassion and have misled parliament and ministers. Victims want an early resolution, possibly brought about by a fully independent review. All of these points were covered by the MPs in the debate.
Sammy Wilson argued that those who ended up using the arrangements “were ordinary workers ─ nurses, teachers, cleaners ─ and some were people who wanted to set up a company”.
He stated: “This House is deeply concerned that HMRC has confirmed the suicides of ten people facing the loan charge and that, despite the Morse Review, thousands face unaffordable demands, with the risk of further suicides.”
Even more shocking was the statement by Sarah Green that one of her constituents thought she had no choice but to have an abortion based on concerns about affordability stemming from the loan charge.
More control demanded over HMRC
The debate heard demands for a full independent investigation, including into the conduct of HMRC. Greg Smith stated: “How can a body of the state ─ the Post Office in the case of the Horizon scandal, and HMRC in the case of the loan charge scandal ─ be autonomous in being judge, jury and executioner at the same time?”
Sir Iain Duncan Smith pointed out that HMRC acts independently as a non-ministerial department and that “HMRC operates almost with impunity” and Sir Robert Buckland called for a root-and-branch review of HMRC.
The Morse Review
The Morse Review of the loan charge legislation was conducted in 2019 by Sir Amyas Morse. One of the recommendations of the review was that loans prior to 2011 would be exempt from the loan charge.
Wilson said that despite the review, HMRC is pursuing open enquiries for schemes before 2011. Duncan Smith said that “it now appears that the Morse Review was not entirely independent – HMRC got to see elements of the report before it was even published”.
Greg Smith raised a worrying point, also made by other MPs, including Kirsty Blackman, that although people have gone through the loan charge settlement process and paid HMRC an extortionate amount of money believing that the matter is closed, HMRC has asked for even more, which means they can never reach the stage of resolution.
The promoters of tax avoidance schemes
Wilson stated what many already know, which is that “HMRC is going after those whom it regards as easy targets. The promoters of the scheme have not paid one penny, despite the fact that they have made hundreds of millions of pounds from the schemes.”
Further criticism came from Duncan Smith who said that Jesse Norman MP, when Financial Secretary to the Treasury, had told parliament of his plans to crack down on promoters of tax avoidance schemes when “it turns out that he did not. Why is a minister allowed to stand at the Despatch Box to make a statement drafted by civil servants, which we then find out is not right?”
Many points were made regarding who should be liable for the tax. Wilson argued that section 44 of the Income Tax (Earnings and Pensions) Act 2003 deems agency workers to be taxable as employees of those agencies and HMRC should have collected tax from agencies at the time. Gerald Jones thought that “the tax burden should not fall solely on the individual users of the schemes but should be shared by the employers and agencies and also, ideally and appropriately, the operators and promoters of the schemes”.
What next for loan charge victims?
Backbench debates are all very well but what is next for the victims who have lived under this burden for years? This now seems in the hands of MPs at the debate and the 255 members of the Loan Charge and Taxpayers Fairness APPG (All-Party Parliamentary Group). The courts will need to be involved if the argument regarding section 44 of the Income Tax (Earnings and Pensions) Act 2003 (which deems agency workers to be taxable as employees) is taken forward.
Can victims endure a court battle which could go on for a long period of time? Take, for example, the recent court case between Kaye Adams and HMRC which lasted 10 years. Any court case would require substantial funding from victims when facing off against HMRC.
MPs agreed that a new and genuinely independent review is needed and that the Morse Review cannot be the final word on the loan charge; but who would be involved in a review and how would victims be confident that it was truly independent?
During the debate, MPs acknowledged that this issue needs to be resolved quickly. Loan charge victims know that for those with open enquiries, just the removal of the loan charge will change nothing for them as HMRC will pursue the amounts they believe are owed under open enquiries. This is why, despite the Morse Review stating that the loan charge would only apply after 2011, people are still being chased by HMRC for monies before this date, as Wilson MP stated.
Must a TV drama be made of this scandal before significant action is taken? If there were to be one, Sir Desmond Swayne MP may have passed the audition to play himself with his rousing speech. What about the Financial Secretary to the Treasury, Nigel Huddleston? Not long in the role, will he take the path of hero or villain in this scandal?
MPs from all parties spoke out against the loan charge. I cannot cover all the points they made or mention all their names but be assured the victims will be watching closely to see what parliament does next.
