HMRC has not made enough progress over loan charge, says House of Lords' committee

HMRC has not made enough progress on the loan charge more than a year after a review concluded the policy caused serious distress to some taxpayers, according to an influential House of Lords' committee.

The Lords' Economic Affairs Finance Bill Sub-Committee has written to the Government to call for a renewed focus on consumer protection and preventing the mis-selling of schemes.

In 2019, a review into the loan charge, conducted by Sir Amyas Morse, found the design and delivery of the loan charge didn’t get the balance right between tackling tax avoidance and protecting the rights of taxpayers and, in some cases, had caused serious distress to the individuals affected.

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The Morse review acknowledged there was a public interest in preventing the use of loan schemes to avoid tax and upheld the principle of taxpayers being responsible for their tax affairs.

The House of Lords' sub-committee found that HMRC had made progress in improving the way it manages the loan charge, but there were far too many shortcomings in the way its response to the Morse review is being implemented.The House of Lords' sub-committee found that HMRC had made progress in improving the way it manages the loan charge, but there were far too many shortcomings in the way its response to the Morse review is being implemented.
The House of Lords' sub-committee found that HMRC had made progress in improving the way it manages the loan charge, but there were far too many shortcomings in the way its response to the Morse review is being implemented.

But it also concluded that the loan charge went too far, overriding taxpayers’ statutory protections by applying an unprecedented 20 year look back period. The review also identified failings in the approach HMRC took to enforcing the policy, which in some cases, fell short of the standards the public has a right to expect; particularly in cases where life changing sums of money are at stake.

The House of Lords' sub-committee found that HMRC had made progress in improving the way it manages the loan charge and in tackling promoters of disguised remuneration schemes, but there were far too many shortcomings in the way its response to the Morse review is being implemented.

The loan charge, announced by the Government in 2016, was designed to tackle tax avoidance schemes where individuals receive income in the form of loans that are not repaid to avoid income tax.

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Sir Amyas, who is the former Comptroller and Auditor General and Chief Executive of the National Audit Office, was commissioned to undertake a review into the loan charge in September 2019 by the then Chancellor Sajid Javid, following a long-running campaign from MPs.

The House of Lords Economic Affairs Finance Bill Sub-Committee has written to the Government after holding a follow-up evidence session on the loan charge.

Lord Bridges of Headley, Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said: “What the HMRC commits to is all too often not reflected in what taxpayers experience with regard to the loan charge. It has improved, but it needs to implement properly the recommendations of the Morse Review.

“We welcome that HMRC is doing more to tackle disguised remuneration schemes at source, including the marketing of these types of scheme through its work with the Advertising Standards Authority.

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"However, it must do more to reduce the exposure of taxpayers to such schemes in the first place. There should also be a renewed focus on ensuring consumer protection and preventing the mis-selling of schemes.”

“HMRC should practice what it preaches and take further steps to avoid using employment agencies and contractors that use disguised remuneration or other tax avoidance schemes”.

In the letter to Jesse Norman, the Financial Secretary to the Treasury, Lord Bridges states: "The evidence we heard on HMRC’s response to the Morse recommendations was mixed.

"Meredith McCammond of the Low Incomes Tax Reform Group told us: “HMRC has responded quite well to the Morse Review. It put out guidance quite quickly on the changes he recommended to the design of the loan charge, issued letters to taxpayers, and issued the draft legislation. It took on board the comments Morse made about its failings in its attitude to taxpayers, some of whom were in real distress."

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However, the Loan Charge Action Group highlighted ongoing flaws it perceived with the way HMRC is administering the loan charge.

Lord Bridges letter states: "For example, although HMRC had set an extended deadline of 30 September 2020 for taxpayers to reach settlement terms with them in order to avoid liability for the Loan Charge, “many people actively engaged in settlement discussions were denied the opportunity to settle” due to HMRC delays."

The letter continues: "Blanche Zaph of the Loan Charge Action Group also told us of problems in relation to contact with HMRC in arranging settlements.

She said: “There have been so many delays; people have missed the opportunity to make a settlement … in many cases, because of HMRC delays, they have missed bites of the cherry. There have been delays in paperwork and none of the amounts are confirmed. Everything is unclear and a mess”.

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Gareth Parris of the Loan Charge Action Group said “the attitude towards and treatment of people has not changed at all. Errors are still being made, there are delays in conversations about settlement of the loan charge, there are discussions that do not really confirm whether you are going to be in the loan charge, and no final settlement discussions”.

"(Tax barrister) Keith Gordon said that “HMRC are used to dealing with deliberate tax avoiders: they have not been able to recognise that the loan arrangements were largely entered into by unwitting avoiders”.

When asked about HMRC’s response to the Morse Review and its subsequent actions, Mary Aiston, Director of counter-avoidance at HMRC, told the sub-committtee “Over the summer, colleagues in HMRC have … supported some 5,600 customers to settle their use of disguised remuneration.

"It is a big-scale exercise and I am not going to sit here and say that in every single case we got our customer service to the level we wanted...in the Government’s response to the Morse review we acknowledged that we had in the past not always got our customer service right in every case.

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"What I can say is that we have successfully supported thousands of people and, if anyone feels they have not had the service that they should have had from us, we take complaints very seriously”.

The letter from Lord Bridges continues: "In relation to concerns that were raised with us about HMRC’s approach to recovering amounts due under the loan charge, Mary Aiston told us that “there is no case where we have forced someone to sell their main home to fund a disguised remuneration settlement” and that they always endeavoured to live up to the commitments of the HMRC Charter, adding that HMRC was “working with people who we accept are sometimes in difficult circumstances and coming up with tailored solutions to support them to settle”.

However, Blanche Zaph of the Loan Charge Action group told the sub-committee: “We know of people who have sold their homes. We know of people who have taken out second charges”.

She added that a big determining factor was often age, as people of working age could take out large loans to cover their liabilities, while people beyond retirement age “risk losing everything they have ever worked for”.

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Lord Bridges letter states: "The Loan Charge Action Group told us that a significant group of people who had settled with HMRC are now receiving ‘loan recalls’ – “in other words facing demands to pay back their outstanding loans by whomever owns the loan balance”, with those loans often having been sold on by the original provider.

"The Loan Charge Action Group stated that “people are being pursued for recovery of all the money they were paid and simultaneously being taxed on it by HMRC”.

"The Loan Charge Action group added that “the fact that loans are being recalled exposes the fundamental unfairness of HMRC’s approach. HMRC insists the loans were not loans, but income, yet are taking no account of recall. This is cruel as well as unfair”.

"The Low Incomes Tax Reform Group told us that action should be taken to protect taxpayers from this situation."

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The letter states: "There is no question that tax avoiders should be targeted by HMRC, but there remains insufficient focus on promoters of disguised remuneration schemes.

"More also needs to be done to ensure that those – such as large employers and agencies – who could do more to ensure tax compliance and prevent the use of such schemes do so. There should be an emphasis on symmetry of treatment between taxpayers and promoters.

"The Government should continue to consider what action it can take against promoters to stop them selling these types of scheme, including considering whether – and how – promoters could be made directly liable for unpaid tax arising from such schemes.

"The Government is taking retroactive measures against the users of such schemes; the same approach should apply to those who promoted and sold these schemes."

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"It is surprising that large employers and agencies, including those in the public sector, are not subject to clear protocols on contractors’ use of disguised remuneration schemes, leaving employees at risk of being caught up in them."

"We would welcome clarification of the appointment process for advisers to the Morse Review, following concerns we heard about its independence."

Responding to Lord Bridges' letter, a Government spokesperson said: “HMRC has reported on the action which they have taken to successfully implement all of the nineteen accepted recommendations of the Independent loan charge review.

“Anyone who thinks they’ll have problems paying the loan charge can ask HMRC for a ‘time to pay’ arrangement.”

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“HMRC remains committed to ensuring that everyone pays the tax they owe, including tackling the marketing and use of disguised remuneration tax avoidance schemes.

“We thank the committee for their letter and will be responding in due course”.

HMRC gave customers affected by the loan charge an additional eight months to conclude settlement or file their tax return and pay the loan charge by 30 September 2020.

Anyone who still needs to file their 2018-19 tax return and pay the loan charge should do so now, the spokesman added.

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"HMRC’s actions to address recommendations aimed at maintaining and developing public trust in HMRC fit with wider actions we are taking to deliver the Government’s 10-year strategy, “Building a trusted, modern tax administration system”.

"Our promoters' strategy sets out how we will tackle those who design and sell tax avoidance schemes and the Government announced further measures on L-Day."

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