In the Loan Charge Review published in December 2019, Sir Amyas Morse said “…the extent to which both sides have become entrenched in their positions was striking.” Four years further on and both sides seem more entrenched than ever. Many ‘victims’ have not settled.
Didn’t the Morse Review sort the Loan Charge
Amyas Morse removed pre-Disguised Remuneration (pre-9 December 2010) loans from the Loan Charge, saying “For the twenty-year look back period of the Loan Charge to be proportionate and justified, taxpayers would need to have acted in a way that was perverse in light of a clear legal position. This was not the case. I therefore conclude that the Loan Charge should not apply to loans entered into, by either individuals or employers, before 9th December 2010”.
However, Morse added, “HMRC should continue being able to settle and investigate cases prior to this point under their normal powers, where they have appropriate grounds, and a legal basis, to do so”.
The consequence of this is that only those who had no open enquiry prior to 9th December, either because they disclosed nothing or because of HMRC failures, were pardoned. Morse’s recommendation to remove pre-DR loans from the Loan Charge meant that HMRC could not pursue those who had received payments free of income tax.
To circumvent this, HMRC later used a discretion under s684(7A) ITEPA 2003 to (retrospectively) exempt payers from an obligation to account for tax under PAYE and to instead chase those who maybe thought were exempt – the recipients of those payments. In doing so, HMRC are not applying “their normal powers” but using a controversial discretion to retrospectively remove a PAYE credit to which recipients of loans were entitled. It is controversial because its use was approved only by HMRC’s own internal ‘Contentious Issues Panel’ some 14 years after it was introduced and was governed only by unpublished guidance.
In order to pursue those with loans post 9 December 2010 HMRC will use the retrospective loan charge. A charge HMRC wouldn’t need if they could use s684(7a) as they argue now! HMRC once said of the Loan Charge, “We win or we win, clever isn’t it!”.
Even when the Loan Charge was whipped away from them, HMRC applies a little-known discretion to still pursue victims back twenty years!
Two taxes on one income
The Morse review achieved very little. indeed you could argue its outcomes are perverse. Those who didn’t disclose are pardoned and those who did disclose continue to be pursued by HMRC.
HMRC settlement terms punish those who were most compliant because they are charged interest and penalties that are not applied to others. Is that how HMRC define “fair“?
It’s as though HMRC deliberately seek to make this as penal as possible for anyone who got involved in loan schemes. Where individuals want to conclude their loan arrangements, HMRC applies Inheritance Tax (IHT) to a loan they originally argued wasn’t a loan and so should be subject to income tax.
Two taxes on the one receipt of ‘income’, was never considered by the ‘independent review’.
How HMRC use Loan Charge settlement terms to extract punishment
A client just received settlement figures on his pre-DR loans and HMRC seek:
- £40k in income tax on the basis this was income, not a loan.
- £20k in inheritance tax on the basis this was a loan and not income.
- £20k in back interest for paying late.
- £5.5k in APN penalties for paying late.
- £2k late interest on the late penalties.
- Forward interest at 8.85% if he cannot pay within 30 days.
The ‘victim’ might have been able to pay the £40k income tax, but two taxes on the one receipt of ‘income’ has put settlement outwith his reach. It is a stalemate, he cannot settle and HMRC cannot act having made a commitment to MPs not to bankrupt Loan Charge ‘victims’. How long will that last?
I believe that when first proposed, HMRC never intended that anyone would be taxed under the Loan Charge. It is so penal that HMRC expected everyone to fold and settle long before the Loan Charge fell due. The Loan Charge takes the income from all previous years and adds it to the income of the current year. So, what might have previously been subject to basic rate tax in the year of receipt, now becomes subject to higher rate tax under the Loan Charge.
Then HMRC capital taxes office got involved and decided they too wanted a piece of flesh, and so added Inheritance Tax to the settlement!
Those who didn’t settle before 30 September 2020, either because they were unable to agree on figures in time, couldn’t afford to settle, or someone convinced them that they could overturn the Loan Charge – now face the penal Loan Charge plus four years of interest and penalties.
That has put resolution out of reach of ‘victims’ and subsequently led to suicides, marriage breakdown, mental health issues due to the stress and a huge amount of anguish. Seven years after the Loan Charge received Royal Assent, we still have 40,000 affected individuals unable to settle and move on with their lives.
HMRC are forcing people to take on unsustainable payment agreements. Many will falter at some point and bankruptcy will follow.
How could the Loan Charge and DR settlements be resolved?
HMRC’s original target for collection by the Loan Charge and wider DR settlement policy was £3.2 bn. HMRC always said that 85% would be collected from employers but they did not mean those who employed contractors. HMRC now say they have brought £3.9 bn “into charge”. If that is true, then HMRC could have hit their target just by applying the Supreme Court ruling in the Rangers FC case to employers, as allowed under the law.
HMRC could just charge income tax and stop trying to inflict punishment with the addition of a second tax charge on the same income, plus interest and penalties:
- Inheritance Tax (IHT) – HMRC told MPs that loans were not real loans and so should be subject to income tax. That was the basis for the Loan Charge. HMRC simultaneously argue these are real loans and if subsequently written-off then inheritance tax arises.
- Back interest – HMRC charges interest on late payment of taxes. Charging back interest at an average of 5% and going back 20 years can add another 50% to the tax due (as per my client above). HMRC do not charge interest to those with no open enquiry. So, two people with identical loans end up paying very different settlements.
- Forward interest – if an individual cannot pay within 30 days, then HMRC may grant them time to pay. HMRC charges interest as above but add an extra 1% premium for HMRC’s risk. The very people who can’t afford to pay get the worst deal. Again, only those with an open enquiry are charged interest.
- APN penalties – in addition to charging back interest on late payments, HMRC also add an extra 15% penalty to those who do not make early payment on account under an Accelerate Payment Notice (APN).
- Residual tax – HMRC 2020 settlement terms allow them to charge the higher of settlement or the Loan Charge. Remarkably, having argued that they could not vary the terms, as they were just following the laws passed by the government, HMRC suddenly managed to vary the terms of the residual tax, but only after the deadline for settlement!
- Discretion – HMRC do not need to seek tax prior to 9th December 2010, they’ve already exceeded their £3.2 bn target. Morse removed those years from the Loan Charge on the basis that the law was not clear before that point.
HMRC could drop the IHT charge, back-interest, the 1% premium, APN penalties, residual tax and the use of their discretion on pre-DR loans which would mean:
- HMRC seek only income tax on loans received.
- Those who need time to pay will be charged a reasonable amount of interest, but not overcharged.
- HMRC will not seek to go any further back than 9th December 2010.
Each one of these suggestions is within HMRC’s capability. No new laws are needed. The government simply needs to instruct HMRC to revise their settlement terms. That might be closer to ‘fair’.
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