The loan charge is retrospective legislation; in other words, it changes a legal position that was in place years ago. Without the chance for people caught by the change to retrospectively amend their actions, it breaks the basic rule of law in the UK.
How can you obey a law when you don’t know what the law is going to be? For example, you’re driving at 30mph today in a 30mph speed limit and then are told the following week that the speed limit has changed retrospectively and is now 20mph. Therefore, last week you were driving too fast and are now being fined.
Loan remuneration arrangements and HMRC
The loan charge is part of a law passed in the Finance Act of 2017. It is a tax charge on all payments of a specific type made to contractors since 1999 to date. It is retrospective, in that contractors have been charged a tax on these payments in that time.
The end users of these payments were paid through loan remuneration arrangements (LRAs) where the loan was never expected to be paid back. Loan remuneration arrangements were and still are legal, despite being regarded as “a loophole in the tax system whereby workers could pay less tax”.
The loan charge affects a minimum of 50,000 people who worked for themselves rather than being full time employees of a company. Many of these people worked on a fixed-term contract basis for companies who insisted that contractors were engaged either through their own limited company or via an umbrella company. They were told to use an umbrella company and that company in turn used LRAs.
However, HMRC did not like these arrangements and “believed they didn’t work”. They did not tell the users of these schemes that they did not approve of them despite the use of LRAs being reported on the users’ self-assessment tax returns, sometimes with a reference for the scheme which had been supplied by HMRC.
In fact, the reference from HMRC made the user feel comfortable in using the arrangement so they were given a false sense of security.
Uncertainty and confusion
When the legislation was introduced a lot of people who worked in this way became worried about their tax situation, as it was not clear if their contracts fell within or outside the legislation. Incorrect assessment would potentially mean facing action from HMRC for paying the incorrect amount of tax.
HMRC supplied a check employment status for tax (CEST) tool to find out if users of LRAs should be classed as employed or self-employed for tax purposes. Between November 2019 and May 2021 over one million users put their data through this tool and a staggering 21% were left without a clear-cut result.
Feeling uncertain and lacking expert knowledge, people sought advice from accountants or tax experts and were told that there were arrangements where the tax position was clear, that the arrangements were known about and approved by HMRC, and had been around for years.
Users thought that this was a clear way forward and would give them certainty in their tax returns and were also further reassured that the arrangements had also been vetted at the highest legal level by tax QCs.
HMRC let the LRAs run for decades without taking any action and in this time, in the background, a tax problem was building up for the end users who had no idea that they were doing anything that HMRC did not believe worked. In fact, the tax problem should not have been for the end users of LRAs but for the companies who had engaged them and were paying them.
Sudden impact of LRA tax charges
Sometime around 2009-2010 HMRC began to take action against LRAs and started to open tax enquiries on the end users of the arrangements.
When the loan charge was first introduced in the finance bill in 2017 it reached back to 1999. HMRC demanded additional tax, for huge amounts plus interest. This had a devastating impact on the unsuspecting end users who had been compliant with the legislation that stood at the time; it has caused divorces, people have had to sell their homes and tragically there have been ten suicides and 13 attempted suicides.
Not many people have settled their loan charge tax liabilities, mainly because of the huge amounts demanded, plus interest, plus inheritance tax (as monies were put into trusts) but also because in the settlement papers HMRC were asking people to sign an admission of guilt for failing to meet their statutory obligations and that they would not take action against HMRC if the situation changed.
Victims fight for justice
The loan charge victims had to fight tooth and nail to get commitment to a review. In September 2019, Sir Amyas Morse was commissioned to lead the Independent Loan Charge Review. However, it turned out to be biased: Morse’s team was staffed by HMRC and Treasury personnel.
Jim Harra, current CEO of HMRC, sent Morse an email on 12 December 2019 to outline the scope of the review (found by freedom of information requests), stating: “at the minimum it should set out something that can reasonably be described as an independent review, but that minimises the spending/legislative/other risks that a review creates”.
A draft of the review was sent to HMRC before it was published widely and one person affected by the loan charge tax has independently taken HMRC to the tax tribunal to get the draft released so that those affected can see any alterations that HMRC may have made to the recommendations in the review report before it was released.
HMRC fought to stop this draft coming out and lost at the tribunal. They will have to release the report, but so far the complainant is still waiting to see what it contains.
Further funding will be needed to get HMRC to release the report. They have an unending source of funds to drag this out (see the Hoey case) until the individuals affected have run out of money. If the review was independent and fair why fight so hard to stop the draft report seeing the light of day?
What about the LRA promoters?
The promoters of these schemes, much like Fujitsu in the Post Office scandal, remain unscathed. One of the largest was AML Tax (UK) Ltd, whose CEO was Doug Barrowman, husband to Michelle Mone. Former financial secretary to the Treasury, Jesse Norman, said that they could not be pursued as they had done nothing wrong. This would seem ironic as the victims who used LRAs sold by promoters are deemed to have acted outside of the legislation that stood at the time.
Despite HMRC making claims that they are chasing promoters of these tax avoidance schemes not one promoter has been prosecuted. Promoters running these schemes have earned a great deal while the people who were sold the schemes face financial ruin.
This week on 18 January there is a backbench debate on the loan charge and the victims are hoping that MPs will speak out for their constituents and all affected. For the victims the fight goes on, but at the start of 2024 things are looking up as interest in the loan charge scandal increases. To quote Stephen Flynn MP, (SNP): “The reality is that when the public come knocking on the doors of this here chamber [House of Commons] seeking justice the government only ever answers when they have no option left.” The loan charge victims need to leave them no other option but to do the right thing.
