Statutory Review into ‘unfair’ Loan Charge

Statutory Review into ‘unfair’ Loan Charge

Fri 25 Jan 2019

The Loan Charge, as part of the 2017 Finance Act (No. 2), was introduced by the Treasury to recover unpaid taxes by individuals who have used ‘disguised remuneration’ schemes – a complex form of tax avoidance involving contractors, employees or freelancers being paid in loans typically via an offshore trust.

HMRC believe these structures do not work and treats them as a form of tax avoidance. The Loan Charge, due to come into effect on 5th April 2019, will result in ‘retrospective’ charges for anyone who entered into a loan scheme arrangement and has not paid the intended amount of tax over the last 20 years or otherwise repaid the loan.

This represented, some have said, a draconian approach which granted HMRC rather unfairly the power to execute a charge on loans going back as far as 1999, where the normal time limits for assessing the tax are now out of time. This led many in the profession to question the fairness of a retrospective Loan Charge.

Recently, more than 30 MPs backed an amendment tabled by Sir Ed Davey, the Liberal Democrat MP, calling for a statutory review on the effects of the Loan Change.

The Treasury has since agreed to review the Loan Charge legislation, with the Prime Minister, Theresa May, herself conceding that the Government has “accepted” the review.

An amendment to this effect has been inserted at [2] New Clause 26 in the Finance Bill (No.3) and the results of the review are now required to be heard by 30th March 2019.

So why is this review significant?

The Loan Charge has attracted considerable controversy due to the retrospective nature of it and the charges are expected to cause severe financial hardship for large numbers of people.

The Loan Charge Action Group, a pressure group states that a person who has paid £50,000 a year for ten years through a contractor loan scheme would be hit with a £277,000 charge. Although they have welcomed the review, they appear to have expressed some reservations about what the results may be.

The Treasury and HMRC has been fully aware of these schemes and the people involved, which includes NHS staff, BBC freelancers, Local Authority workers, Teachers and even contractors working for HMRC.

The House of Lords Economic Affairs Committee Report [1] into the powers of HMRC, was also particularly concerned and critical about the retrospective effect of the Loan Charge legislation. It recommended, amongst other things, that ‘that the Loan Charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC.’

Mazars view

Whilst the statutory review into the Loan Charge is welcomed by us, it is important to emphasize that the outcome of the review remains uncertain.

Indeed, since the Loan Charge is already in primary legislation, it is hard to see what options could even be available to HMRC or the Treasury when the review is due to finish on 30 March 2019, only five days before the charge becomes due. Decision-makers will need to consider:

  • The feasibility of changing primary legislation within five days.
  • The prospect of the Loan Charge has already induced many clients to settle with HMRC. Any significant change step might raise the prospect for repayment claims from those who feel that they have been disadvantaged. Indeed class action might follow.
  • If any easement or deferred terms are to be offered, how will this be justified under the law? HMRC can exercise its discretion over implementation of the law under its “collection and management” powers set out in the Revenue and Customs Act 2005, but only in circumstances which produce a “net benefit” to the Exchequer.
  • Having set out their position firmly in an area where HMRC has previously been criticised for being slow to act, backing down now would set an awkward precedent for other areas where HMRC wishes to take a similarly firm line.

We believe it is unlikely, in the short time remaining to review the Loan Charge, that anything will change substantially and it is most likely that the charge will remain due and payable on 5th April 2019. Therefore, we would advise that it would be wise to still plan on the Loan Charge going ahead.

We will of course continue to keep you updated on any further developments into the Loan Charge. However, if you are affected by the charge and you would like to discuss what options are available to you and how we can assist you then please call us on 0207 063 4639 or 0161 238 9235 to speak to a member of our Tax Investigations team.

[1] The House of Lords Economics Affairs Committee 4th Report of Session 2017-19 The Powers of HMRC: Treating Taxpayers Fairly. Pages 23 to 29.

[2] The House of Commons Consideration of Bill (Report Stage) Finance Bill (No.3) Amended Note. Page 25.

[3] Loan Charge Action Group Website