The Loan Charge Circus

The loan charge works by adding together all outstanding loans and taxing them as income in one year.

Recently in parliament, cross-party backbench MPs engaged in a debate concerning the contentious Loan Charge legislation, while those affected await resolution. This legislation, introduced retrospectively in the 2016 Finance Act, targets tax avoidance through disguised remuneration schemes.

The loan charge is a measure designed to counteract tax losses to HMRC resulting from various ‘disguised remuneration’ schemes. These schemes involved individuals receiving payment in the form of loans, typically provided by third parties like ’employee benefit trusts,’ funded by employers. Notably, these loans were structured to be unlikely ever to be repaid, exploiting the fact that loan proceeds, unlike salaries, are mostly not considered to be income and are thus not subject to income tax or National Insurance.

Previously considered legal albeit frowned upon by HMRC, the Loan Charge altered the legal landscape retroactively, leading to sudden and substantial financial demands on those entangled by these schemes, spanning several years.

This issue has garnered significant public attention, notably following media coverage such as the ITV series “Mr. Bates vs The Post Office” and revelations linking Doug Barrowman, husband of Lady Michelle Mone, to AML Tax UK Ltd, a major proponent of Renumeration Trust schemes. Consequently, parliamentarians recently deliberated these schemes and their impact.

The affected population is diverse, including contractors initially believed to be self-employed, as well as a broader range of taxpayers using disguised remuneration schemes. These schemes have historical roots, with some used by banks and financial services to pay bonuses and others by employers for highly paid individuals.

Low-paid agency workers and contractors, particularly those affected by IR35 regulations, have been in the spotlight. Contractors often turned to loan schemes when uncertain about their self-employed status under IR35. The employment/self-employment boundary’s ambiguity and the tax incentives for self-employment contributed to the appeal of these schemes.

Seeking swift resolution, some advocate for an independent review to address these grievances, a sentiment echoed in the parliamentary debate.

During the parliamentary debate, Sammy Wilson (MP of East Antrim and Chief Whip of the DUP) emphasised that those drawn into these arrangements were often ordinary workers, including nurses, teachers, and cleaners, alongside individuals seeking to establish their own companies. Disturbingly, concerns were raised about the toll on mental health, with reports of suicides linked to the Loan Charge, prompting calls for urgent action, akin to those affected by the Post Office scandal

Furthermore, there were calls for greater scrutiny over HMRC’s conduct, with demands for an impartial investigation into the agency’s actions. Concerns were voiced regarding HMRC’s perceived autonomy and lack of accountability, prompting calls for fundamental reforms.

The chancellor commissioned Sir Amyas Morse to produce an independent report of the Disguised Renumeration Loan Charge for the benefit of the chancellor of the Exchequer and the Financial secretary to the Treasury. The reported recommended exemptions for loans predating 2011; however, doubts persist about its independence, with allegations that HMRC had undue influence over its findings. Additionally, grievances were expressed regarding HMRC’s conduct while handling settlements, with individuals reporting persistent demands from HMRC even after supposedly resolving their tax liabilities.

Criticism has also been directed towards the promoters of these tax avoidance schemes, with accusations being made that they have evaded accountability despite profiting immensely. Calls were made for a more equitable distribution of the tax burden, suggesting that employers, agencies, and scheme operators involved in the promotion of these scheme should share responsibility alongside individual users.

Looking ahead, the plight of Loan Charge victims remains uncertain. While parliamentary debates offer a platform for discussion, concrete solutions remain elusive. The involvement of the courts may become necessary, particularly regarding legal interpretations of pivotal legislation such as section 44 of the Income Tax (Earnings and Pensions) Act 2003. However, the prospect of protracted legal battles against HMRC raises concerns about the financial and emotional toll on victims.

In conclusion, there is a consensus amongst MPs that a comprehensive and truly independent review is imperative to address the grievances raised by the Loan Charge victims. However, questions remain about the composition and impartiality of such a review, leaving victims apprehensive about the prospects of meaningful resolution.

Further articles on the loan charges and disgusied renumerations can be found here

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