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Comment: The loan charge review – where are we now?

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Speed read

The report Independent loan charge review: report on the policy and its implementation’, conducted by Sir Amyas Morse, was published on the 20 December 2019. It details a series of recommendations that cause a shift in both the collection powers afforded to HMRC under the loan charge legislation and make its application to the targeted a subset of taxpayers less certain. The government response was almost immediate, accepting the majority of changes proposed in the report; however, a number of questions remain unaddressed. In advance of draft legislation supporting these changes, to be published early this year, advisers who have affected clients will need to understand the changes and identify opportunities for challenge in order to protect their interests. 

What is the loan charge?

The loan charge was introduced within F(No.2)A 2017 and was furthered by supplementary provisions in FA 2018. Estimated to raise £3.2bn over five years, it was introduced to tackle so-called disguised remuneration schemes which saw ‘individuals being paid in loans through structures such as offshore employee benefit trusts’ (Budget 2016 policy paper, para 4.27).

In short, the legislation in its original form sought to impose a means for HMRC to assess and collect what it alone considered to be unpaid tax arising between 1999 and 2016. It would do so without the need for a timely enquiry to have been made or assessment issued.

To achieve this, it proposed to charge in 2018/19 all outstanding ‘loan’ balances arising from a ‘disguised remuneration’ scheme. A taxpayer who used these (undefined) arrangements from 1999 may have done so with no enquiry or intervention whatsoever from HMRC; however, they could suddenly find themselves with a tax liability based on up to 20 years’ worth of payments – all due in one tax year.

The proposed charge was (and is) highly unusual in that it overrides the usual taxpayer protections on time limits; includes terms that have no legal definition; seems to be an attempt to sidestep a Supreme Court decision that HMRC actually won; and ignores basic fairness.

Only the intervention of the Treasury Select Committee eventually forced HMRC to admit that the real purpose was to draw a line under enquiries made into such schemes – enquiries that are visited upon users in a seemingly random manner and which have made very little progress in the past 15 years.

For many, if not most, the result would be immediate insolvency. A challenge to the legislation was inevitable.

The road to an independent review

That challenge began at the legislation’s introduction but escalated significantly in May 2018 when Stephen Lloyd MP tabled an early day motion which argued that ‘retrospectively taxing something that was technically allowed at the time, is unfair’. His proposed amendment was that ‘the charge … apply only to disguised remuneration loans entered into after the Finance Act 2017 received Royal Assent’.

This was an ambitious motion which, if successful, would remove the retrospective nature of the charge entirely. This was supported and furthered by MPs and pressure groups, most notably the Loan Charge Action Group. An extensive line up of trade bodies and industry professionals also contributed, offering both written and oral evidence.

In December 2018, the Lords Economic Affairs Finance Bill Sub-Committee, following extensive evidence gathering both oral and written, published its own review on the powers of HMRC, which concluded that HMRC fell short in many critical areas. The loan charge received special mention with suggestions that not enough had been done to separate ‘deliberate and contrived tax avoidance by sophisticated, high-income individuals, and uninformed or naive decisions by unrepresented taxpayers’. The report recommended that the legislation be ‘amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been “closed”’.

Subsequently, on 8 January 2019, Sir Edward Davey tabled an amendment to the Finance Bill (New Clause 26) during the report stage of Finance (No.3) Bill 2017-19. This amendment would compel the government to carry out a review in relation to extended time limits afforded to HMRC in opening an enquiry, where non-deliberate offshore non-compliance was a factor. Whilst this clause was not loan charge specific, due to restrictions in due process, its intention was to ‘reveal the unfairness of the retrospective nature of the current loan charge legislation’.

This new clause was accepted by the government and subsequently, on 26 March 2019, the Treasury published a review of the loan charge as required by FA 2019 s 95, entitled A report on time limits and the charge on disguised remuneration loans.

This report became an extensive and blatant defence of the loan charge along with the collection methods used to combat disguised remuneration and concluded that: ‘The government is clear that the legislation is not retrospective.’

Whilst the report’s conclusion was not a surprise, the Treasury’s defence of the loan charge was unusual in its candour. Of notable concern was the PR nature of the statements made. There were suggestions that those affected were very high earners, and the report stated that: ‘Contrived tax avoidance is unfair, not least to the 99.8% of individual taxpayers who are not involved in this sort of activity.’ The statistics and commentary lacked evidential support and contradicted earlier published facts. It was clear that the government (perhaps prompted by HMRC) was committed to defending the loan charge rigorously.  

The report provoked a notable increase in campaigning and calls for changes to the legislation. During a House of Commons debate on the charge on 4 April 2019 a motion by Ross Thomson et al, was carried, unopposed, noting that: ‘This House expresses its serious concern at the 2019 loan charge; expresses deep concern and regret on the effect of the mental and emotional impact on people facing the loan charge; is concerned about suicides of people facing the loan charge…; believes that the loan charge undermines the principle of the rule of law by overriding statutory taxpayer protections’.

As a result, on 16 July 2019, the paymaster general and financial secretary to the Treasury, Jesse Norman MP, informed the House of Lords Economic Affairs Committee that the loan charge would not apply to unprotected years, where participation in a loan scheme had been fully disclosed. This was a very minor concession owing more to semantics than substance, but at least he attended the meeting, something his predecessor, Mel Stride, has refused several times to do.

Brexit loomed and many feared that changes to the charge would not arrive in time to be effective. Cue the prime minister offering a further concession. On 4 September 2019 in response to a question at PMQ, Boris Johnson MP said: ‘I am sure that members on all sides of the House have met people who have taken out loan charges in the expectation that they can reduce their tax exposure. It is a very, very difficult issue and I have undertaken to have a thoroughgoing review of the matter.’

The review would consider whether the loan charge was an appropriate response to the tax avoidance behaviour in question and provide an analysis of its impact and affordability for those affected.

The importance of the above timeline is to illustrate the reluctance of government to offer any concession to one of the most punitive and unusual pieces of legislation in recent history. This must be questioned when so many informed, independent bodies saw the damage it was causing. It has not, therefore, been without significant commitment from a large number of dedicated parties that the review has taken place.

The review and what transpired

The review was placed into the hands of Sir Amyas Morse, recently retired head of the National Audit Office. It was to be concluded by mid-November and a report made to the chancellor of the exchequer. The call for a general election in December delayed this original date.

On 20 December 2019, the report and the government response was published. Many recommendations for changes had been made and the majority of them were accepted. It should be noted that the speed at which HMRC and the government reviewed the findings and made changes is encouraging. Most expected a significant delay to allow for the charge to take effect, but a proactive response was issued immediately.

Changes include:

  • The loan charge will apply only to loans received on or after 9 December 2010.
  • The loan charge will not apply to loans which have been ‘fully disclosed’ but where HMRC has failed to take action (i.e. open an enquiry).
  • Taxpayers could spread taxable loan balances over three tax years (2018/19 to 2020/21).
  • Previous agreed settlements which included ‘voluntary restitution’ would be revised and refunds made where appropriate.
  • Taxpayers could defer filing their 2018/19 self-assessment tax returns until September 2020 in order to consider the impact of the changes.

The report, whilst welcome, did exclude some vital points. Many users of these schemes assert that they have been duped or pressured into using them. The motivation for entering the arrangement was not covered.

Almost all the Parliamentary commentary includes the statement that the promoters and employers should be liable for the tax and relevant case law (Rangers) supports this. This is not mentioned. 

Additionally, HMRC’s inaction in years past is not adequately explained or justified.

There is no reasonable justification for not amending the self-employed version of the charge in line with the employer version.

All of these points will form the backbone of continued lobbying, and we welcome confirmation that the Loan Charge APPG has been reformed post the election.

Loans received pre-9 December 2010

Excluding from the charge loans prior to this date acknowledges the retrospection of the charge, contrary to Treasury assertion. However, retrospection is retrospection.

Why therefore should retrospection be recognised and removed only pre-December 2010?

The justification is that this date saw the introduction of ITEPA 2003 Part 7A (as inserted by the FA 2011). The review repeats HMRC’s claim that this legislation put it beyond doubt that tax was due. This is almost certainly overstating the case. It was always unrealistic to expect any reasonable taxpayer to be able to understand this legislation. It does not even use the phrase ‘disguised remuneration’ anywhere within it. In June 2011, the House of Lords Economic Affairs Sub-Committee said ‘[the legislation is] extremely complex and beyond the scope of most businesspeople to decide whether or not it applies to them’.

Secondly, this legislation was narrow and did not take into consideration self-employment. Inevitably in 2011, promoters offered arrangements claiming self-employed status as a quick and easy fix.

Taxpayers were encouraged to consider scheme promoters as professional advisers who could be relied upon. Indeed, a number of accountants, employers, agencies and promoters were aligned in the view that it was no longer compliant to operate as a contractor under employee principles; contractors should be self-employed, remain in their contract and nothing else would change. As a result of this and no HMRC intervention, the contractor was assured that all was in order.

To create separation between dates, as a result of this legislation, is to fail to appreciate the detail of what happened at the time and to artificially create a stake in the ground that does not exist. Retrospection in tax is not justifiable; it erodes taxpayer safeguards, damages the separation of powers and hinders the rule of law. Similarly, retrospection should not be justified by the existence of irrelevant legislation.

Loans received on or after 9 December 2010

The review also attempts to remove retrospection post December 2010 where involvement in a scheme had been fully disclosed to HMRC, which then failed to open an enquiry.

In the absence of draft legislation (expected in early 2020), we can only speculate as to what ‘fully disclosed means’. Sir Amyas’ report recommends that those who have given reasonable disclosure, at the time, should be excluded. HMRC has interpreted this remarkably narrowly, noting the same effect for those who have made full disclosure in the self-assessment tax return retreating to the words of Jesse Norman claiming only ‘full’ disclosure will suffice. More grounds for challenge surely.

Assuming we rely on HMRC’s interpretation for now, it is expected that to some extent it will fall back on the guidance previously issued during the employee benefit trust settlement opportunity (EBTSO) in 2014 (see Employee benefit trust: settlement opportunity guidance published 14 August 2014 and withdrawn on 4 April 2017). Whilst the guidance was specifically aimed at employers, we can still gather insight.

In particular, the guidance on ‘Sufficient information’ at para. 2.5 states: ‘What is important is that the information available on either the CT returns … included details showing that sums had been attributed to or allocated to an individual employee, so an earnings charge under section 62 ITEPA 2003 would arise.’

Similarly, it is useful to explore relevant case law to anticipate ‘full disclosure’. Many of those impacted are pointing to the fact that they submitted a P11D with a benefit in kind value of the loan, in the hope that this will count towards full disclosure.

Langham v Veltema [2004] EWCA Civ 193, whilst a case regarding discovery, made it clear in the Court of Appeal that it is not sufficient to expect HMRC to seek out information held elsewhere in the department such as Company Accounts and P11Ds, but rather it is for the taxpayer to include enough detail on his return to alert the officer that there may be an insufficiency of the self-assessment.

In short, the minimum standard remains unclear. We consider it likely that where a DOTAS scheme reference number was applied for and granted, this would need to be on the self-assessment tax return (SATR). It is, however, a fact that almost all post 2010 arrangements were not disclosed (only in the last 12 months has HMRC taken litigation on this point).

By 2010, however, HMRC had clearly identified the issue and this was no doubt informed by evidence gathered and analysis undertaken. It would be reasonable to assume that the major schemes were known to HMRC. It had PAYE records, SATRs and intelligence, and could have easily ‘discovered’ who the users were and made enquiries. It chose not to. It will therefore be unfair to claim that disclosure is less than the standard required, when HMRC is equally culpable. We unfortunately see this question being resolved only in tribunal.

Similarly, this provision now makes it essential for advisers to look again at the enquiries and assessments issued. If held to be invalid and disclosure was made, the loan charge can be discounted. Was the enquiry issued in time? If a discovery assessment, is the concept of staleness apparent (as developed in recent case law, such as Beagles v HMRC [2018] UKUT 380)? Remember that the notice also needs to be received in time, not just sent in time. HMRC will normally post all letters by second class mail (anything else requires internal approval), which by case law is considered to take four days to be delivered. Recent cases in the tax tribunals have turned on HMRC being required to evidence the posting of a letter, not just anecdotal evidence of process, and have come up short more than once in examples we’ve seen.

Deferring SATR 2018/19

The government’s response is clear that lack of draft legislation prior to the normal filing date of 31 January 2020 creates uncertainty. The proposed delay for filing to 30 September is welcome.

Taxpayers can choose to file their return by 31 January 2020 with an estimate of the loan charge or wait until September 2020 to file. The concession is that no penalties for late payment/late filing will be levied in relation to the loan charge aspect of the return. We have already seen accountants and taxpayers suggest that the normal return can be filed in September. We believe that this is not the case. We recommend a safer course of action.

Splitting loan balance over three years

The government accepted the recommendation that the loan charge could be split over three tax years. As must be appreciated, those affected in contracting have income that can be uncertain and varying. In certain circumstances, this could produce a situation where an even spread option creates a higher liability than if it was all declared in 2018/19. This will of course only be clear at the end of 2020/21. With the time limit for amending self-assessment being just 12 months from the original due date, careful planning will be required around this point as the ability to reverse the decision to split the charge will be time limited.

Refunds for voluntary restitution

De facto it is acknowledged that voluntary restitution (payment of money for years not ‘protected’ by HMRC) was coerced under threat of the loan charge. Payments made or agreed for these years will be refunded where CLSO2 was utilised. Many taxpayers felt that they were left with no other choice but to settle, simply because of the threat that the loan charge would bring to their wellbeing and family. The acknowledgement that these amounts were never due is welcomed, but again this highlights the retrospective nature of the charge and it is clear that more can be done to relieve this.

The report, however, fails to say whether the tactics adopted by HMRC are acceptable either in this specific instance or, as we are increasingly finding, as part of a wider strategy to ‘maximise revenue’. 

Additional considerations

Supplementary to the headline provisions noted above are three lesser acknowledged points:

  • Housed within the response is the decision to implement an HMRC unit to focus on recovery of the pre-2010 years. It is assumed that this is an effort to close out historic enquiries that have remained open for so long. However, the vagueness around this provision may alarm some taxpayers. Many taxpayers have picked up on this point in isolation and have assumed that HMRC will seek to use extended time limits to reopen old years that now are no longer attributable to the loan charge. Clarity here is needed.
  • The review recommended that HMRC write to individuals at least once a year to update them on the status of their enquiry. In principle this is a positive suggestion and one that would promote a good standard of communication between HMRC and its ‘customer’. Disappointingly, the government’s response does not appear to fully accept this. Instead, it states that 'HMRC should keep in regular communication with taxpayers whose tax affairs are under enquiry' and adds 'HMRC will review their internal guidance and processes to ensure the recommendation is implemented.'
  • The report concludes that the stated objective of the Loan Charge has not been met, which was to shut down the use of the arrangements. Concluding that many users had entered into the schemes post 2016, perhaps offers further evidence that justification for entering the arrangements should have been explored more fully. If the Loan Charge has not met is stated aim, why should it remain in force?
  • A final recommendation is that those taxpayers affected who earn less than £30,000 p.a. and agree settlement should have their liability written off after ten years of continuous instalments. It is perhaps easy to see why HMRC has rejected this, but again, it would have been a positive step forward in recognising the nature of those caught up in the arrangements and shows that Sir Amyas appreciates this.

Summary and next steps

The revisions to the loan charge as a result of the review are to be welcomed, as is the extent of the report, despite the short time available. It is clear that whilst not going as far as needed, they remain a positive starting point upon which further debate, discussion and reform can occur. More is, however, needed and we must progress accordingly.

What is certain is that, for the vast majority of those affected, this is not the end of the road. Outstanding enquiries will need to be litigated or settled, all of which will continue for many years to come.

In advance of the draft legislation being published therefore, advisers will now need to consider some key points.

For those clients who have received loans in the past:

  1. Were they received pre-9 December 2010, as if so they are no longer in scope?
  2. If received on or after 9 December 2010: Is there an enquiry or discovery? Is it validly executed and delivered? Are there any arguments including ‘staleness’ of discovery which can be argued?
  3. Consider when and how to file the 2018/19 SATR should one be required.
  4. Consider carefully the use of spreading the loan charge over three years and the effect this my have on income and pension contributions.
  5. Have a discussion with your client about joining a litigation group to defend their involvement, or alternatively, if the provisions remove a percentage of liability due to multiple unprotected years pre-2010, settlement may now be an option.

It is well known, and more recently forms an ever increasing part of HMRC’s literature, that the four pillars of taxation are commonly characterised as equity, certainty, convenience and efficiency. It is equally clear that the loan charge threatens all four and that the review alone solves none. There is still much more to be done and it now becomes imperative for stakeholders to take the lead from those who have worked tirelessly to achieve what has been established so far.