HMRC must “rebuild the trust” of taxpayers after Loan Charge failings

HMRC must "rebuild the trust" of taxpayers after Loan Charge failings

Government’s "misunderstanding" of how contracting works led to misinterpret "accidental" tax avoidance, critics say

HMRC must “rebuild the trust” of taxpayers after Loan Charge failings

The UK government must take action to correct its “heavy-handed” handling of the Loan Charge in order to regain the trust of taxpayers and prevent such shortcomings from happening in future, market participants say.

“Going forward, HMRC needs to listen to the criticisms made in relation to its handling of the loan charge and reflect on them to achieve real change,” says Hugh Gunson, partner at law firm Charles Russel Speechlys.

“It should make a concerted effort to ensure it strikes the correct balance between collecting tax and treating taxpayers fairly in line with its charter.”

Introduced by the government in 2017, the Loan Charge was designed to tackle tax avoidance schemes where individuals receive income in the form of loans that are not repaid to avoid income tax and National Insurance contributions (NICs). As a result of the policy, taxpayers are required to pay the outstanding tax retrospectively as a lump sum, leaving many exposed to higher bankruptcy risk.

Crucially, it is thought that tax avoidance schemes were mis-sold to many workers by lawyers or accountants, and therefore that the promoters of the schemes should be liable rather than the contractors themselves. As a consequence, a number of contractor enquiries on the Loan Charge policy remain open and unresolved.

What’s more, it is widely argued that the retrospective nature of the Loan Charge runs counter to the fundamentals of UK taxpayer protections.

“In many cases, HMRC’s handling of the Loan Charge was heavy-handed and lacking in empathy, and failed to take account of the taxpayer’s circumstances,” says Gunson.

“HMRC should also focus now to ensure that all outstanding loan charge enquiries are closed down as soon as possible, as well as streamlining their procedures for matters such as voluntary restitution payments.”

A case involving Rangers Football Club in 2012 is now considered to be one of the landmark events in the Loan Charge saga. The club was found to have been paying its players through an employees’ remuneration trust with the intention of avoiding income tax and NICs.

The approach was denounced by HMRC later that year, and following a five-year legal battle between the two sides, a 2017 Supreme Court hearing unanimously adjudged the income paid to a third party to still be taxable. The case has since been cited by HMRC as precedent to enforce the Loan Charge and take action against disguised remuneration (DR) schemes.

However, a series of Freedom of Information requests filed earlier this year tells a somewhat different story, revealing weaknesses in the HMRC’s stance. Most notably, uncovered emails written by chief executive Jim Harra suggest that the department’s objective was to seek legal precedent for enforcing the Loan Charge, and that its attempts to do so were unsuccessful.

“In recent months I have repeatedly tried to obtain legal analysis to understand the strength of our claim with very little success,” said one email.

Another said: “We have not obtained decisions establishing that individuals are taxable on DR loans as income.”

The issue has once again regained attention in recent weeks, as Labour party leader Sir Keir Starmer revealed that he has ordered Shadow Treasury ministers to meet with Loan Charge campaigners to discuss the matter and work towards a solution.

“We believe HMRC has urgent questions to answer about the handling of this issue and to ensure enforcement is fair and proportionate,” Starmer said in a letter addressed to tax barrister Keith Gordon, who has campaigned extensively against the Loan Charge.

“We will continue to push for HMRC to resolve cases in a fair and effective manner.”

This action is long overdue from the Labour party, says Steve Packham, founding member of the Loan Charge Action Group. It’s critical that they recognise the “true injustice” of the Loan Charge, he argues, noting that there has previously been “little official Labour party interest” in defending those caught in the scandal.

“The Labour front benches have come to the party very late in the day, and they probably should have engaged two years ago.

“Thankfully, this incoming meeting gives us a golden opportunity to explain just how the Loan Charge clearly undermines the rule of law.”

Following considerable public backlash, the government commissioned an independent review of the policy in 2019. While acknowledging that the Loan Charge was in breach of overriding taxpayers’ statutory protections through its 20-year retrospective scope, it concluded that the charge should still apply to loans made on or after December 9 2010.

In explaining why the situation was mishandled and what needs to be done next, Packham argues that “a lack of understanding of the way the contracting market actually works” is a key issue within the government, and must be rectified.

Packham goes further to argue that “there’s been a misunderstanding […] from the very beginning that what individuals have been involved in is a different type of tax avoidance that’s been done accidentally.”

“These are just normal people who tried to work the best they can with some very unclear legislation.

“The revenue did not do their job at the time, and that is a simple fact. They need to put in legislation for the future to stop this happening again.”

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