Government must act over 'heavy-handed' loan charge - Tom Minnikin

Let me make it clear that I do not condone the use of artificial schemes intended to avoid tax.

Tom Minnikin

The mass-marketing of such arrangements by promoters over the last two decades has cast a shadow over the tax profession, and the general good work that, as advisers, we undertake daily, guiding clients through the maze of complex legislation.

However, it is through the lens of this complicated system that I come on to the controversy surrounding the ‘loan charge’. In 2016 the Government decided to introduce a charge upon outstanding loans from employee trusts and similar structures.

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The rationale for this policy was understandable – HMRC had been frustrated by the proliferation of these schemes, which were designed to re-route income to individuals (often contractors working through agencies) in the form of tax-free loans.

I have held two main issues with the loan charge since it was introduced. Firstly, as was originally the case, it gave HMRC the ability to go back up to 20 years in assessing tax on loans, even though these years may have ordinarily been ‘closed’.

Secondly, the measure takes no account of individual behaviour. In cases I have dealt with I frequently hear things like “my accountant told me this wasn’t illegal” or “the scheme was supported by a barrister’s opinion”.

Of course, you might ask why the individual didn’t question the legitimacy of the tax saving, but hindsight is a wonderful thing.

People expect their professional advisers to give trustworthy advice. These issues were examined during an independent review carried out by prominent civil servant, Sir Amyas Morse, last year. As a result of his recommendations, the Government agreed to limit the loan charge by restricting it to loans taken out on or after 9 December 2010.

This is the date upon which anti-avoidance rules, known as the “disguised remuneration” legislation was introduced. Sir Amyas concluded that the introduction of these rules made clear the Government’s view of how loans should be taxed.

However, whilst I generally agree with this statement, I say this from the standpoint of being tax professional who follows each Budget and Finance Act closely. I am not sure that the ordinary man on the street would have necessarily been aware of the 2010 changes, unless it was spelt out. The Government and HMRC did not always publicise the matter well enough either.

Furthermore, I am aware that some promoters continued to sell schemes after December 2010 on the basis that they were “not caught” by the disguised remuneration rules.

Other promoters failed to mention the legislation at all. There are then other cases where the individuals (particularly agency workers) had no option but to accept the scheme or face not being employed. Often the loan was set at a level equivalent to their net pay, yet they are the ones now being asked to settle the tax.

I am sympathetic to these groups of individuals, for whom the loan charge must seem unfair.

The Government has begun to listen, and the Morse review has certainly helped some. However, there continue to be issues. I still see examples of ‘heavy handed’ tactics being employed by HMRC towards those individuals who remain caught by the loan charge. Undoubtedly this is affecting mental health. Sadly, for some, it has led to suicide.

This leads me to make two final observations. Firstly, I question whether the powers of HMRC have gone too far. As was reported recently, my own firm has written to the Treasury expressing concerns about HMRC’s approach in this area.

Secondly, I question whether the Government’s policy in general has been sound. The predominant focus seems to have been on pursuing individual taxpayers without any recourse to the promoters or enablers.

More recent legislation seeks to address this issue, but this will come as no comfort to those who find themselves faced with significant liabilities where the promoters have long fled the scene.

By Tom Minnikin, Partner Forbes Dawson

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Thank you

James Mitchinson