The controversial loan charge will remain in force while an independent review considers whether the policy is an appropriate way to deal with disguised remuneration loan schemes, the U.K. government announced.
Amyas Morse, former head of the National Audit Office, will lead the review commissioned by Chancellor of the Exchequer Sajid Javid. Tax barrister Keith Gordon told Tax Notes that the review must include a call for evidence.
“The outcome of this review will not only impact those subject to the loan charge. It is also likely to inform how HMRC tackles tax avoidance in the future,” George Bull, senior tax partner at RSM, said in a statement.
The loan charge was introduced to tackle “contrived schemes where a person’s income is paid as a loan which does not have to be repaid,” HM Treasury and HM Revenue & Customs said in a joint statement September 11.
The announcement came five months after more than 100 members of Parliament signed a letter urging former Financial Secretary to the Treasury Mel Stride to announce a six-month suspension to allow for an independent review.
Gordon has previously called for a repeal of the legislation and criticized HMRC’s handling of inquiries. He noted that Morse, a chartered accountant, “certainly has the skills” to conduct the review.
“It is understandable why the review has been given such a short timetable, but this will leave many people wondering whether there is sufficient time to allow the review to be as thorough as it needs to be,” Gordon said in a statement emailed to Tax Notes. “I hope that, if at any time in the next two months Sir Amyas considers that more time will be needed, he will feel able to request an extension and require all enforcement activity related to the loan charge to be suspended in the meantime.”
Treasury said it has asked Morse to report back by mid-November, “giving taxpayers certainty” ahead of the January 31 self-assessment tax return deadline.
“These disguised remuneration schemes are highly contrived attempts to avoid tax, but it is right to consider if the loan charge is the appropriate way of tackling them. The government fully appreciates the concerns expressed by individuals, campaigners, and MPs who have raised concerns about the loan charge,” Stride’s successor Jesse Norman said.
The schemes “continued to proliferate” despite targeted antiavoidance legislation introduced in 2011, and the government announced the loan charge in 2016, Treasury noted. “That gave users three years to either repay the loan, settle the tax due with HMRC, or face an income tax charge on the stock of outstanding loans.”
The loan charge “remains in force, in line with current legislation,” HMRC said, adding that the government will “consider and respond to the outcome of the review once it has concluded.”
“If you are not settling your disguised remuneration scheme use, you will still need to complete an additional information return by September 30. If you fail to do so, HMRC reserves the right to charge penalties,” HMRC said in a guidance note alongside the September 11 statement.
Taxpayers who are no longer using a scheme, and have paid the tax they owe in full, will not be directly affected by the announcement of the review, HMRC said. But further guidance will be issued if the potential loan charge liability changes as a result of the government’s response to the review. Taxpayers now paying what they owe in installments should continue to do so.
The message for taxpayers who provided all required information by April 5 and are waiting to finalize a settlement with HMRC was that they can continue to finalize that settlement if they wish to do so. “Settling your open enquiries and appeals will allow you certainty in your tax affairs. We want to work with you to finalize your tax affairs and get out of avoidance for good,” HMRC said. But it recognized that some taxpayers in this position may want to wait for the outcome of the review.
The government acknowledges claims that the policy is retrospective, and has commissioned the review to consider its impact on individuals, according to the published terms of reference for the review.
Morse is asked to consider whether changes announced by the government before and since the loan charge took effect address legitimate concerns raised, including “affordability for those affected.” The review must take account of the impact on wider tax fairness and HMRC’s ability to tackle tax avoidance effectively in the future.
The terms document notes that while Javid will determine the timing and manner of the publication, Morse is expected to use his discretion and “will have the final say” on the report’s content.
Morse will be supported by a team of officials drawn from Treasury and HMRC. Gordon said that while this ensures that the cost of the review will be borne by the Exchequer, “there will be the perceived conflict of interests given that HMRC and [Treasury] are likely to come in for a lot of criticism.”
The review must include a call for evidence, Gordon added. “If anything has already been learned from the past 24 months, it is that HMRC and [Treasury] officials are able and willing to manipulate facts in order to justify their actions in respect of the loan charge. Accordingly, external evidence is essential,” he said.
Bull suggested that Treasury officials were “caught on the hop” when Prime Minister Boris Johnson announced the review in the House of Commons September 4. Many campaigners will be disappointed that the loan charge has not been put on hold pending the outcome, he said.
“It’s very important for those subject to the loan charge to follow the published advice. In essence, those who have already settled should do nothing, [and] those who have settled and are paying by installments should continue to do so,” Bull said. “Importantly, this review will look at the retrospective nature of the loan charge, which has led to so much criticism from those affected, and from the tax profession.”
"Telling sole traders that they’ll have an update on where they stand as late as November, with then potentially only two months to settle up, is unreasonable," Mike Cherry, national chair at the Federation of Small Businesses, said in a statement. "The loan charge is causing misery for thousands of sole traders — many of whom were acting on the advice of employers or financial professionals when they agreed to schemes which were, at the time of participation, perfectly legal."
“A lot of these people are not financial experts or high earners. There are individuals being targeted here who could lose everything. The priority must be intervening to protect those who were following professional advice or guidance from employers or third parties," Cherry added.
The government's statement reiterated its view that "disguised remuneration schemes do not work" and that their use is "unfair to the 99.8 percent of taxpayers who do not use them."