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House of Lords slams the 2019 loan charge – will HMRC follow these 5 recommendations?

4-minute read

Sam Bromley

18 December 2018

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The 2019 loan charge is coming on 5 April 2019, but peers have blasted the retrospective tax in a comprehensive enquiry.

In a wide-ranging publication called ‘The Powers of HMRC: Treating Taxpayers Fairly’, the Lords say that the 2019 loan charge was “the most frequently raised issue” in their call for evidence.

2019 loan charge: the story so far

The 2019 loan charge tackles the use of ‘disguised remuneration’ schemes, a complex form of tax avoidance involving contractors and freelancers being paid in loans.

HMRC knew about these schemes but didn’t start closing their loopholes until 2011. And in 2017, they introduced the 2019 loan charge – a retrospective charge on loans going back as far as 1999.

Taxpayers can choose to repay any outstanding loan before 5 April 2019 or sign a settlement agreement with HMRC (the deadline to notify HMRC of intent to settle was 30 September 2018).

If taxpayers don’t settle or sign a settlement agreement, their ultimate bill could be higher after the charge is applied.

5 recommendations from the House of Lords

The Lords made five key recommendations. Here they are at a glance – you can read more about them below:

  1. Exclude taxpayers who disclosed their involvement in the schemes
  2. HMRC should review cases where individuals can’t pay
  3. Publicise actions HMRC takes against promoters of schemes
  4. Set up a dedicated helpline
  5. HMRC should declare when they start investigating schemes

Why are the Lords calling the legislation unfair?

Back in 2011 the government said that tax law can only be applied retrospectively in ‘exceptional circumstances’ – many experts say that these circumstances aren't exceptional.

And in May 2018, we reported that Stephen Lloyd MP was launching a motion in parliament, saying “people who acted in good faith are being punished for the Government’s own imprecise legislation”.

Since then, organisations like the Loan Charge Action Group have been fighting the legislation. The group says their mission is to give guidance to those affected – they highlight that contractors and freelancers are being driven to depression and, in some cases, are suicidal.

After receiving evidence from people affected, the Lords have specifically called out HMRC’s handling of the 2019 loan charge in a new enquiry.

While saying that people caught in ‘disguised remuneration’ schemes should accept some responsibility, they published recommendations for HMRC on how to handle the situation from here.

1. Exclude taxpayers who disclosed their involvement in the schemes

We recommend 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 or which would otherwise have been “closed”.

The Lords seem to be acting on evidence from taxpayers who say HMRC raised ‘no enquiries’ on tax returns.

As people used these schemes openly, experts have questioned whether it’s fair that HMRC can then apply a retrospective charge.

The Lords’ report also says that some ‘felt that HMRC is using the loan charge to cover up its own failures to act in a timely manner’.

2. HMRC should review cases where individuals can’t pay

We recommend HMRC urgently reviews all loan charge cases where the only remaining consideration is the individual’s ability to pay.

The Lords note that HMRC’s actions are causing considerable anguish for many, especially those with no clear ability to pay. They say that HMRC are threatening individuals with ‘arrangements that could result in bankruptcy’.

It seems that the Lords would like to see HMRC take a more lenient approach.

3. Publicise actions HMRC takes against promoters of schemes

We encourage HMRC to do more to publicise any actions it is taking against promoters of disguised remuneration schemes.

A common criticism aimed at HMRC is that they’re targeting taxpayers rather than the groups and organisations that may have pushed them into using schemes, including end clients, intermediaries, and promoters.

The Lords go as far as to say that HMRC is prioritising tax revenue over justice, even though they do have the power to deal with promoters of tax avoidance schemes.

So, the Lords would like to see more from HMRC on what they’re doing to tackle those who advertised schemes openly. They rule out simply publishing information online as an effective way to highlight these actions.

4. Set up a dedicated helpline

We also recommend that HMRC establishes a dedicated helpline to give those affected by the loan charge advice and support.

The recommendation goes on to say this ‘should take place well in advance of the loan charge coming into effect in April 2019.’

The Loan Charge Action Group say they’ve been receiving distressed calls from taxpayers, but they don’t have the trained support to help.

HMRC have previously said they deal with callers ‘sensitively’ and may suggest they contact other support networks like Mind and the Samaritans. But they believe it wouldn’t be ‘appropriate’ to offer support other than helping people get their tax affairs in order.

5. HMRC should declare when they start investigating schemes

We recommend that HMRC makes a declaration, in a clear and accessible public statement, as soon as it begins investigating a potential tax avoidance scheme.

The Lords say this declaration should be targeted at those most likely to be affected, and that online guidance won’t be sufficient.

The use of online guidance has been specifically called out, as HMRC has used its ‘Spotlight’ web publications before to make its views on tax avoidance schemes known. The Lords’ report suggests these publications are ‘little read’.

The report also suggests that HMRC tells a taxpayer it’s investigating an avoidance scheme as soon as possible, if the taxpayer declares the scheme on their tax return. This would set up a clearer dialogue between the tax body and taxpayers.

Will HMRC take notice of the recommendations?

HMRC has told peers they’re assessing the evidence they received. The Loan Charge Action Group believes the ‘tide is turning,’ going on to say: “it is time that this monstrous unethical piece of legislation was amended and HMRC held to account for its appalling treatment of 'customers'.”

If you’re affected by this legislation it’s best to seek professional advice.

What do you think of the Lords’ recommendations? Let us know in the comments below.

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