Growing support among members of the U.K. Parliament for a suspension of the controversial loan charge suggests that many MPs did not understand the legislation they passed in 2017, a leading tax professional said.
As of April 9, more than 100 MPs had signed a letter from the Loan Charge All-Party Parliamentary Group (APPG) to Financial Secretary to the Treasury Mel Stride urging him to announce that the loan charge will be suspended for six months to allow for an independent review.
“In a fair tax system, both the amount of the tax and the way it is imposed must be seen to be fair,” George Bull, senior tax partner at RSM UK, told Tax Notes, adding that while 281 Conservative MPs voted for the bill that became Finance (No. 2) Act 2017, he understands that 47 Conservatives are members of the APPG.
“Based on the size of the APPG, it seems that many MPs did not understand the nature of the legislation they were enacting,” Bull said in an emailed statement on April 9.
“For their part, HM Revenue & Customs and the government are clearly sticking to their guns,” Bull added. He said he did not expect to see “any substantive statement” in response to the APPG’s representations until after April 11, “if at all.” MPs will resume on April 11 a debate that was suspended on April 4 before ministers could respond.
“Disguised remuneration schemes pay loans in place of ordinary remuneration, with the sole purpose of avoiding income tax and National Insurance,” Stride told MPs at Treasury questions earlier on April 9.
“If the loans were illegal at the time my constituents took them out, why is it now necessary to introduce the loan charge?” asked Labour MP Christian Matheson.
“If, instead of paying an employee their earnings in the normal way, an employer pays them by way of a loan via an offshore trust in a low- or no-tax jurisdiction — with no intention of ever repaying the loan and simply to avoid National Insurance or income tax — that is wrong,” Stride replied.
Critics of the loan charge, which applies to loans made after April 6, 1999, that remained outstanding as of April 5, 2019, argue that taxpayers are entitled to finality in their tax affairs. “This concept is not unique to tax,” Keith Gordon, barrister at Temple Tax Chambers, wrote in the Financial Times on April 4. The loan charge “cuts right across” the safeguards provided by established time limits and “imposes a retrospective (some say retroactive) tax charge,” he added.
But Stride told MPs that disguised remuneration loan arrangements have “never, ever complied” with the tax code.
Labour MP Mary Creagh asked Chancellor of the Exchequer Philip Hammond what steps he was taking against “accounting firms that told my constituents, who are working in the IT sector with a government department, that these schemes were perfectly legal.”
Hammond told Creagh that “as well as pursuing tax avoiders themselves, we have to pursue those who promote tax avoidance.” Stride had told him that HMRC was investigating more than 100 promoters of avoidance schemes, Hammond added. Stride later cited HMRC’s tribunal victory over Hyrax Resourcing Ltd., noting that “it was found that the promoter was not behaving appropriately, and about £40 million worth of tax is likely to be recouped as a consequence” of the tribunal’s decision.
Labour MP Rupa Huq called on HMRC to “show some humanity to loan charge victims,” adding that children are suffering “because of tax arrangements made years ago.” Stride said he was confident that HMRC “takes its duty of care towards customers — particularly vulnerable customers — very seriously.”
HMRC updated on April 6 its guidance on reporting and accounting for liability to the loan charge.
‘Dangerous Reality’
The APPG said its 91-page report published on April 3 exposed “the dangerous reality of the loan charge, with its impact on people’s mental health.” The report followed a “select committee-style” inquiry that received over 900 written submissions and held two oral evidence sessions. HMRC officials and Stride refused to give evidence to the group.
The first session heard from tax professionals. The second session, which was for people facing the loan charge, heard from the family of a person who “tragically committed suicide due to the pressure from the loan charge,” the APPG said.
The APPG concluded that the loan charge “is retrospective, overrides taxpayer protections, and undermines the rule of law.” It claimed that HMRC has “systematically abused” rules governing the opening and closing of inquiries into tax returns, and alleged that HMRC and HM Treasury have waged “a cynical campaign of misinformation.”
“Worst of all, the evidence seen and heard by the APPG shows there is a clear risk to the mental welfare of people facing the loan charge, including a known suicide risk. The APPG was notified that there have already been suicides of people facing the loan charge, including one acknowledged by HMRC. The inquiry criticizes in the strongest possible terms HMRC’s failure to set up a proper 24-hour counseling helpline, despite knowing the clear suicide risk,” the APPG said.
The APPG thus called for a “six-month delay and suspension” of the loan charge and all associated tax settlements, and an independent review of the charge to be led by an experienced tax judge. “Closed years” should be outside the scope of the loan charge, and a 10 percent tax rate should be offered for taxpayers who wish to “draw a line under the past and move on with their lives,” it argued.
APPGs are informal cross-party groups that have no official status within Parliament, according to the Parliament website. The Loan Charge Action Group, formed to provide information and support to loan charge taxpayers, is the APPG’s appointed secretariat.