LCAG Response to HMRC Loan Charge Briefing,
published 18th July 2018
1. Disguised remuneration
Disguised remuneration schemes are tax avoidance arrangements that cost the Exchequer hundreds of millions of pounds each year.
They seek to avoid Income Tax and National Insurance contributions by paying scheme users their income in the form of loans instead of ordinary remuneration.
The loans are provided on terms that mean they are unlikely to be repaid, so they are no different to normal income and are taxable.
It was not until December 2010 that the first attempt at what is described as ‘disguised remuneration legislation’ was issued.
Notably, the three spotlights (33, 36 and 39) referred to in HMRC’s briefing footnotes (pls refer to the last page) were only published from July 2016 onwards and only on the GOV.UK website.
That legislation was flawed in many ways. These flaws were exploited by many promoters in existence at the time and new schemes developed. HMRC was aware of such schemes but failed to act, permitting those behind them to claim that HMRC, by its silence, was tacitly approving of them.
HMRC’s approach to identifying individuals who used such arrangements and opening enquiries can best be described as haphazard. Some individuals have had enquiries, some not. Some enquiries have been followed up, most have not. Where HMRC has asked questions, it’s very clear that despite 15 years of knowing that the arrangements were “artificial”, they do not understand them. HMRC also applies different tests between the measure of such schemes for income tax (fact based) and IHT (literal interpretation of documents). How, in the face of such inconsistency, HMRC can claim any coherent policy or approach is a mystery. If HMRC is confused, taxpayers can be excused for being equally unsure.
HMRC has never had binding judicial sanction for its view on liability until the Supreme Court case on Rangers. That case decided that there was a tax liability on what was described as loans but that the liability falls upon the employer. The identity of the liable party is routinely missed out of all HMRC analysis and instead the decision is cherry picked. We can speculate on why, but certainly HMRC has not made any serious attempt now or in the past – despite always knowing the artificial nature of the arrangements – to chase employers with the powers they have at their disposal. Instead they chose the soft target of the individuals.
Far from successfully litigating “a number of cases”, there have been two (so that appears to be a deliberately dishonest statement). One went to First Tier Tribunal and HMRC won a case that was specific to its facts. The other was won only after some unusual Judicial leniency permitted HMRC in changing its argument at a late stage and held that the EMPLOYER was liable to tax. A fact conveniently ignored by HMRC.
2. The charge on disguised remuneration loans
The charge on outstanding disguised remuneration loans, known as the 2019 loan charge, was announced at Budget 2016 and was introduced in the Finance Act (No 2) 2017.
The charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019. The charge will not arise on outstanding loans if the individual has agreed a settlement with HM Revenue and Customs (HMRC) under existing law before 5 April 2019.
HMRC’s statement is evidencing that the 2019 Loan Charge clearly is 20 years retrospective as it applies “to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019”.
Retrospection means that income (HMRC claim loans were always income) arising in a previous year is taxed by reference to laws made after the income was received.
By any measure, this is what the loan charge does and therefore is retrospection.
All LCAG asks is for the Loan Charge to commence from the date of the passage of the 2017 Finance Act, then it gives thousands of small businesses and self-employed people the certainty as to how to arrange their companies and tax affairs and avoids the disastrous consequences that will otherwise occur should this ill-considered policy be pushed through unamended.
We hope that this factual response exposes the attempt to mislead and to defend an dreadful policy, that HMRC themselves know will bankrupt thousands, decimate the contracting sector in the UK and is leading people to consider taking their own lives.
3. Why the loan charge has been introduced
The vast majority of people pay the right amount of tax on time, but a small number of individuals and businesses try to avoid paying what they owe through tax avoidance schemes.
The charge has been introduced to tackle the use of these schemes and ensure that users pay their fair share of tax and contribute towards the publicly funded services we all use. This policy is expected to raise £3.2 billion for the Exchequer.
Disguised remuneration schemes have always been an attempt to avoid tax. HMRC’s view has consistently been that these schemes are ineffective, challenging their use and publicising their risks.
If it has “always” been HMRC’s view that these schemes do not work, why was this largely unknown in the contractor community until now? As of mid-July 2018, many have not even received their ‘2019 Loan charge letter’ yet and are blissfully unaware.
HMRC have previously stated that the schemes ‘never worked’. They further state DR schemes are, and were always, tax avoidance and that the loans were never loans and therefore always in reality, income.
However – the law says otherwise: Whilst the ‘Rangers case’ stated that these loans were indeed taxable, this makes this position the case from 2016 onwards though and before then the courts said something else entirely.
Read McDonald v Dextra Accessories and Others (2003) which held that loans achieved the “outcome promised when they were being marketed” HMRC did not appeal the income tax on earnings aspect of that decision and for taxpayers it was not at all unreasonable that they should then believe the law to have been settled.
There was then the later case of Sempra Metals Ltd v HMRC (2008) which again confirmed that the loans were not taxable.
So for HMRC to claim that these loans were, as Jon Thompson stated in a recent letter to the signatories of the EDM, “always unacceptable”, is not just incorrect but is in direct disagreement with the Courts.
4. Who it affects
The charge will affect users of disguised remuneration schemes who haven’t repaid their loans or signed a contract for settlement with HMRC by 5 April 2019.
It is estimated that up to 50,000 individuals, or less than 0.2% of individual Income Tax payers in the UK, will be affected by the loan charge.
Based on the information available, 65% of those affected work in the business services sector. This includes professions such as management consultants and IT consultants. Ten per cent work in construction. Fewer than 3% work in medical services (doctors and nurses) and teaching.
Disguised remuneration schemes users, on average, earned twice as much as the average UK taxpayer. Seventy per cent of users have used these schemes for 2 years or more. Repeated use of disguised remuneration schemes will inevitably result in large tax liabilities.
According to the government’s own Taylor review, the “UK is widely recognised as having one of the most flexible labour markets in the world” and further states that “self employment now accounts for around 15.1% of total employment.”
According to IPSE, “between 2008 and 2017 the number of solo self-employed increased by 34%” with a “solo self-employed contribution of £271bn to the UK economy”. The Taylor review concludes that “government should ensure consistent messages on the value of self employment in enabling people to be economically self-sufficient.” The Loan Charge is anything but doing that and will have a huge negative impact on the UK’s gig economy and freelancing.
It is a fact that there are NHS workers who are caught up in this mess and subject to the Loan Charge. Yet this is something, that HM Treasury failed to realise when it introduced the policy.
The Independent Health Professionals Association (IHPA), representing locum doctors and other health professionals, can confirm that they have members who are subject to the Loan Charge.
An article in the Times has quoted figures suggesting that 2-3% of those affected by the Loan Charge are NHS workers, mainly locum doctors, so working on HMRC’s own estimate, that means some 1000-1500 doctors and – in addition – many nurses working in the NHS and covering vital shifts will be affected. This will clearly affect the NHS, yet no mention of this at all in the impact assessment and now a claim made in Parliamentary answers that the Loan Charge will not have a significant impact on the NHS.
Despite the fact that it has been confirmed that NHS workers are subject to the Loan Charge, HMRC appear to remain in denial or hellbent on denying the truth in their ongoing attempt to cover-up the real impact of this policy. Patrick O’Brien of HMRC has claimed “nurses and doctors were not involved in these type of schemes”. This statement is clearly wrong and in stark conflict with the numbers (3%) given in the briefing document and suggests a worrying lack of competence as well as utter confusion.
Maybe, due to the disguised nature, HMRC does not really know the true extent of scheme usage and, in such case, also the likely negative impact.
Users of disguised remuneration schemes are NOT high earners – as HMRC wants us to make believe – and instead will affect tens of thousands of contractors, freelancers and agency workers including social workers, supply teachers, bank nurses and locum doctors who were recommended to become self-employed under umbrella companies by employers, professional advisers and employment agencies.
It is unfair that HMRC are now pursuing individuals who acted in good faith rather than the client organisations, agencies or umbrella companies, all of whom benefited significantly from this whilst the workers affected received none of protections or the benefits of employment including sick or holiday pay.
5. What the loan charge means for scheme users
Scheme users who don’t come forward and sign a contract of settlement with HMRC by 5 April 2019 could have to pay more when the loan charge is applied. Detailed settlement terms were published online on 7 November 2017 to help users understand what settling means for them. HMRC is writing to those affected to encourage people to come forward and settle under existing law before the loan charge applies.
One of the most shocking things is that HM Treasury and HMRC failed to do a proper impact assessment and have therefore pushed through a policy without actually knowing the effects it would have on individuals, on the contracting sector and on the NHS.
This is the Government’s impact assessment, referred to in Parliamentary Questions on the Loan Charge https://www.gov.uk/government/publications/disguised-remuneration further-update/disguised-remuneration-further-update, which states that “this measure is not expected to have any significant macroeconomic impacts”.
This is patently not true – many people have experienced severely detrimental impacts on family stability including relationship and marriage breakdown.
LCAG has conducted its own analysis of its member base highlighting the following negative effects of the loan charge:
Depression / Anxiety / Mental health impact: 68%
Loss of residence/ home: 49%
Divorce/ Relationship breakdown: 31%
Loss of career: 30%
Suicidal thoughts/ self-harm: 25%
It goes on to say that “The government anticipates that some of these individuals will become insolvent as a result”. Yet gives no prediction of how many people will be insolvent and how many will go bankrupt, nor of the costs involved to the taxpayer. Extraordinarily, they don’t say how this will affect the amount of revenue HMRC will actually collect, even though clearly they will not collect tax liabilities from people who can’t pay and declare bankruptcy.
This means that their figures of how much ‘revenue’ the Loan Charge will collect are also deeply flawed.
6. What scheme users should do
HMRC wants to make it as easy as possible for people to come forward and settle their tax affairs.
Users of disguised remuneration schemes should register their interest as soon as possible. All the information required to settle must be sent to HMRC by 30 September 2018.
Since the loan charge was announced, more than 5,000 individuals and employers have agreed to pay the tax they owe, contributing more than half a billion pounds of additional revenue to the Exchequer. A further 20,000 people have contacted us to register an interest in settling.
We appreciate that for some people who have used these schemes, paying the tax due will have a significant impact. Flexible payment arrangements are available to anybody who has genuine difficulty paying what they owe.
HMRC will allow scheme users to spread their payments over 5 years if their taxable income in 2018 to 2019 is estimated to be less than £50,000, as long as they are no longer in avoidance.
Those with higher incomes and those who need to pay over a longer period can also request for extended payment periods, which will be considered on individual circumstances.
If anyone is concerned that they have no realistic way of paying what they owe, they should call HMRC as soon as possible on 03000 534 226.
HMRC are well-known for giving the impression they are very sympathetic and helpful when – in reality -they are ruthlessly using Accelerated Payment Notices (APNs) to demand huge and unaffordable payments including over disputed sums, with no independent right of appeal for the individual.
Whilst they continue to do sweetheart deals with large corporations, the reality is they are pursuing individuals who cannot defend themselves, ignoring the scheme promoters and going after the low-hanging fruit rather after real tax avoiders and evaders.
The claim that HMRC will “agree a manageable…payment plan” is untrue. People will be bankrupt or insolvent. Careers will be lost. Pensions raided. Houses sold. Families reduced in circumstances. All because HMRC is claiming 15 years after the fact and 15 years after sitting on their hands and 15 years of watching and doing nothing, that there is a liability.
Expecting taxpayers to meet several years of liability within 12 or 24 or even 60 months is unrealistic. It is akin to asking someone who has just taken out a mortgage to repay it within one to five years. Any attempt to go beyond those periods is met with resistance and usually denial. HMRC then resorts to Court action (or the threat of such) to bully and intimidate with an undeniable link on the rising numbers of contractors with serious mental health issues or suicidal thoughts.
As well as the disinformation campaign being waged by HMRC, it is also deeply disappointing that the Minister responsible for this invidious policy made an incorrect statement in the House of Commons – and has so far refused to correct parliamentary record, despite being asked to do so: https://www.hmrcloancharge.info/blog/lcag-pressrelease-04-07-18
In Treasury questions (3rd July 2018) Mel Stride that “the arrangements entered into by those who are in scope of this measure [the Loan Charge] were not legal when they were entered into, even though they may have been entered into in the past”. This is simply and completely wrong. The schemes were legal and there has ever been any suggestion that they were not.
This latest ‘slip-up’ shows the utter mess around the Loan Charge, with HMRC and HM Treasury misleading MPs, making incorrect statements and denying the real impact of the policy.
7. How HMRC is tackling promoters of disguised remuneration schemes
HMRC has a range of powers to tackle those who promote or enable tax avoidance, including imposing penalties of up to £1 million or the whole of the fees earned for attempting to enable avoidance.
HMRC reports promoters to the Advertising Standards Authority and professional bodies.
We also consider criminal investigations, which can lead to convictions and jail terms for those promoting of tax avoidance schemes.
HMRC as well as Mr Thompson (and Mr Stride) are keen to give the impression that they are pursuing, indeed seeking to prosecute promoters and scheme arrangers. Yet whilst these claims may sound tough, they have no basis in fact.
Referring schemes still advertising to the Advertising Standards Authority is at best a façade of action. The most often talked about case resulted in the promoter changing less than a dozen words in its advertising and they remain today pushing a scheme that is very unlikely to work but which continues to attract users!
No prosecutions in the area of contractor arrangements are forthcoming and none likely given that HMRC has allowed most of the firms to quietly close and the individuals behind them to move away.
8. Find out more
Disguised remuneration: settling your tax affairs pages help people understand what settling means for them and the process they should follow. The Tax avoidance disguised remuneration pages help people recognise tax avoidance schemes and settle their tax affairs with HMRC.
Spotlights on tax avoidance identify features of tax avoidance that HMRC has started to investigate- these will be relevant to users of disguised remuneration schemes:
● Spotlight 33: Contractor tax: loan schemes can cost you more
● Spotlight 36: Disguised remuneration: schemes claiming to avoid the new loan charge
● Spotlight 39: Disguised remuneration: re-describing loans
Notably, the three spotlights referred to above were only published from July 2016 onwards and only on the UK.gov website:
Spotlight 33 – First published on 7th July 2016
Spotlight 36 – First published on 14th February 2017
Spotlight 39 – First published on 10th August 2017
Consequently, the 2019 Loan Charge, coming into force in April 2019 with its captive retrospective effect over the past 20 years represents HMRC’s blunt legislative tool to rectify its own ‘sins of the past’ over flexible working arrangements, grown out of the ill conceived IR35 legislation as its root cause.
Despite Mel Strides’ and HMRC’s continuing claims that “its announcement at Budget 2016 provided scheme users with a three-year period to repay their loans, or to agree a settlement with HMRC before the charge takes effect”, the loan charge remains widely unknown in the contractor community. As of mid-July 2018, many have not even received their ‘2019 Loan charge letter’ yet and are blissfully unaware of it.
The human impact of this retrospective legislation cannot be understated. We have members who are on strong and ongoing antidepressants and similar medication purely due to the stress and uncertainty imposed on them by HMT and the 2019 Loan Charge. Members who are afraid they will not be able to work again in their current sectors due to CCJs and bankruptcy. Members who have already had to sell their homes displacing their families and children in order to pay APNs for a debt they do not owe, and in HMRC’s own words is “spurious” (HMRC: on average 78%)1
1 i HMRC Real Time Information programme (RTI) Post-implementation review, Dec 2017 – according to: https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-outsourced-debt-collection-costs-soar Full RTI report available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/664971/Real_Time_Information_progra mme__post_implementation_review_report.pdf