Amongst all the hullabaloo of the Conservative leadership contest, Liz Truss made a promise which has brought a glimmer of hope to people enmeshed in what some call the loan charge ‘scandal’. In leafy Purley, she was asked:
“The Treasury have now confirmed nine suicides of people facing the controversial loan charge. This unfair law overrides basic taxpayer protections and is thoroughly un-Conservative. Will you commit to a genuinely independent review and to resolve this issue before more people take their own lives?”
“It is appalling to hear about that and the way the whole situation has been handled has been very poor in my view and we’ll look at what we can do on that specific issue … I’ll certainly look at that and it’s very, very tragic, I think, that this has happened.”
Truss will need all her experience as a former chief secretary to the Treasury if she is to succeed in finding fair resolutions to what appear to be intractable disputes between HM Revenue & Customs (HMRC) and several thousand of its ‘customers’ (as HMRC insists on calling taxpayers, apparently with a straight face).
The disputes are about involvement in what HMRC calls ‘disguised remuneration’. They were brought to a head by the loan charge, which was announced in the 2016 budget and whose avowed purpose was to stamp out disguised remuneration loan schemes and short circuit thousands of open tax enquiries. It seems not to have caused much of a stir initially, but, as people came fully to understand it, they realised that it raised questions about the rule of law and who should bear the cost, when there is a failure to collect tax.
Disguised remuneration schemes: mis-sold?
Disguised remuneration schemes were developed about 25 years ago to enable employers of highly paid people to shelter part of their pay from income tax and national insurance. They differed in detail, but the key to all of them was to get money to employees in a form which was, technically, not liable to income tax. The most common way of doing this was for the staff member to receive a loan, either directly or, more commonly, via a third party. The intention was that the loan would never be repaid. Loans are not usually taxable income.
People may find it surprising that this was ever thought to work. HMRC’s view was that it did not and that the loans were taxable as pay, but it failed in attempts to persuade a court of this. Eventually, in 2017, in the Rangers Football Club case, the Supreme Court held that tax, in the form of PAYE and national insurance was due on the payments made to the third party, as opposed to the loans themselves.
Indeed, if HMRC’s view of the law was correct, why was the loan charge needed? The answer appears to be this. Most tax avoidance schemes are the preserve of a few well-off people (“only little people pay taxes”, as the nice lady said), and HMRC’s usual methods of dealing with them are sufficient eventually either to prove they do not work or to legislate them out of existence.
However, during the first 20 years of this century, disguised remuneration schemes proliferated. In addition to big employers, their promoters found markets among owner-managed businesses and independent contractors. Ironically, many of the latter were not trying to avoid tax but to trying to comply with another piece of tax legislation (IR35), and believe they were mis-sold disguised remuneration as a solution, or were unaware of the implications, which left many of them no better off after they had paid the promoters’ fees.
According to HMRC, at the highest point, there were at least 250 schemes. No-one really seems to know how many people have used them. (The statistics about the loan charge which HMRC discloses are hard to interpret). HMRC’s original estimate of 50,000 individuals was revised up to 61,000. Other estimates go as high as 100,000. HMRC’s evidence to the Morse Review estimated the total amount of tax on individuals at stake as £1.875bn over 20 years. (There are about 32 million income tax-payers, and income tax paid in 2021-22 totalled £224bn).
Effects of the loan charge
Despite 2011 legislation designed to stop them, promoters continued to produce schemes which they sold as being ‘legal’ and which were used thousands of times. Quite a few people were avoiding tax. As HMRC frequently points out, this is unfair on employed people (the overwhelming majority) who pay their taxes in the conventional way.
HMRC therefore had a problem which it had been slow to grip. Frustrated that its usual methods were not working and were tying up expensive and limited resources, it asked parliament to enact the loan charge.
As enacted, the loan charge said that if a person had received a disguised remuneration loan at any time after 5 April 1999 and had not repaid it by 5 April 2019, they must pay income tax as if the outstanding amount was part of their income in the tax year 2018–2019. This has the following key effects:
- It taxes loans made many years ago, about which HMRC did little or nothing at the time and which were not taxable under the law as it was understood then;
- People pay tax on loans even though the time for HMRC to collect that tax on any ground is well past;
- It ‘stacks’ loans into a single tax year which can mean the taxpayer pays more tax than would have been the case, had they paid tax in the year each loan was made;
- It deprives people of their ‘day in court’ to argue that they are not liable;
- Employees pay liabilities which should have fallen to their employer, but which HMRC is out of time to collect.
There was a way out. A taxpayer could avoid the loan charge if, before 5 April 2019 (about 18 months after the law came in) they either repaid the loan or loans or ‘settled’ with the Revenue, which meant paying the amount of tax which the Revenue says they should have paid when they first received each loan, plus interest and penalties.
Reactions to the loan charge
As the full implications of this sank in, there was vigorous reaction outside and inside parliament. Amongst other things, critics said that the loan charge was retrospective, punitive and unnecessary for achieving HMRC’s aims; many would be faced with unexpected tax bills which they could not pay; some would have to sell their homes, liquidate their pension funds or borrow money when they were too old for this to be wise.
As time passed, the strain and worry became too much for some: marriages broke down; the health of taxpayers and their families was affected; some took their own lives, while others considered it.
Whilst acknowledging everyone’s personal responsibility for their own tax affairs and the need to stop avoidance, critics say the problem would not have arisen if HMRC had identified it earlier and moved quickly to shut down the schemes, to collect tax payable from the promoters and to publicise widely the risks which people were taking.
These views are supported in many quarters, including the House of Lords economic affairs committee and the all-party parliamentary loan charge and taxpayer fairness group (Loan Charge APPG). This has become the largest of all the APPGs, mainly because of the stories about the loan charge which MPs have heard from their constituents.
The Morse Review
Boris Johnson, under pressure from MPs on all sides and some of his own constituents, commissioned Sir Anyas Morse (now Lord Morse) in 2019 to carry out an independent review. It has been questioned how truly independent the review was, given the weight of evidence provided by HMRC and the Treasury. Nonetheless, Lord Morse decided that the loan charge was not “proportionate in terms of its design and effect on individuals” and that “the way in which HMRC had dealt with some people fell short of standards that they might reasonably expect”. He made 20 recommendations to water down the key effects of the loan charge, of which the government accepted nineteen.
Morse said some people were justified in feeling that they had been badly treated by the Revenue because, for instance, of errors and delays in settlement calculations and demands to pay tax by one part of HMRC while settlement discussions were under way with another. He noted that HMRC’s powers to combat tax avoidance have increased and warned that there needed to be a commensurate increase in HMRC’s capacity to manage dealings with individual taxpayers.
Morse also noted that the loan charge had not stopped the promotion and use of disguised remuneration schemes. It is hard to see how it was going to do that, because it is a one-off charge which looks backwards. It does not apply to any loans made after 5 April 2019.
Unfair settlement terms
In accordance with its other stated aim, the loan charge was clearly designed to induce every past user of a disguised remuneration scheme to ‘fess up’ and settle the tax demanded, because this would be cheaper for them.
It is just possible that this would have worked. Some users say they would pay a reasonable amount to get out of a situation which, frankly, they find more than just embarrassing. For others, whichever way they go, the total bill is unaffordable. However, there are elements of HMRC’s settlement terms which many feel are unfair and therefore unacceptable. These include:
- Interest compounded over many years;
- Penalties for filing incorrect tax returns which they believed in good faith to have been correct and in line with the law at the time;
- ‘Voluntary’ restitution of tax for years where the Revenue would never otherwise be able to collect that tax;
- Signing a statement that they have failed to meet all of their statutory obligations, which they believe is not true and see as an attempt to shame, if not criminalise, them;
- Signing away the right to repayment if it ever turns out they have made an overpayment.
Crucially, there would not be full and final settlement of all their possible liabilities, so HMRC could come back for more. Indeed, one of the Morse Review changes was to exclude from the loan charge loans made before 9 December 2010. HMRC is now actively pursuing people for tax on these older loans under the ‘old’ rules.
The apparent result is that the number of people who have agreed a settlement or paid the loan charge is a small proportion of those who are potentially liable for it.
This means that civil servants initiated, ministers proposed and parliament approved legislation which was not proportionate to the problem it was meant to solve and which Keith Gordon calls “pernicious”. A barrister at Temple Tax Chambers, Mr Gordon has studied the loan charge extensively and given evidence about it to the reviews referred to above. He, and others, point out that the loan charge is unique – no similar step has been taken over any other form of tax avoidance.
Leaving aside the effect on individuals, it is the way in which the loan charge looks backwards, excludes the jurisdiction of the courts and reopens closed tax years and what this means for the rule of law and natural justice which concerns its opponents. Lord Morse decided that this was in principle justified when balanced against the need to stamp out disguised remuneration schemes and to short circuit the disputes process.
Many say that the main issue is that HMRC’s failure to pursue the promoters, who made substantial profits from fees paid by users but who have mostly now disappeared, means that the real culprit has escaped scot-free while HMRC attacks the softest targets.
It remains to be seen whether Truss delivers on a review and a fair resolution. She could start with a settlement proposal which a group of tax professionals sent to the chancellor in December 2021 without, so far, any result.