Earlier this week, The Telegraph reported that HMRC charged interest on a tax debt after taking a whole 18 months to produce the payable figure. Gary Colby, the frustrated taxpayer in question, requested to settle his retrospective unpaid income tax after HMRC opened an investigation under the controversial 2019 loan charge legislation. While protests of ‘but surely that’s illegal?’ may sound reasonable, the Treasury profiting from its own tardiness is nothing new.
HMRC investigations are notoriously drawn-out, anxiety-inducing affairs – to be charged for that time would cause (understandable) outrage. Is there anything taxpayers can do to combat such fines?
What is the 2019 loan charge?
The 2019 loan charge is a piece of legislation introduced by HMRC to target historical tax debt from contractors that used a disguised remuneration scheme to save on income tax and NICs from 6th April 1999. The scheme involved paying the contractor a low salary while making up the rest of their income via a third-party ‘loan’ that was never intended to be paid back, thus helping the contractor take home up to 90% of their net pay.
The loan charge has been heavily opposed both inside and outside parliament. There are two main reasons why many deem it unethical:
Misinformation about disguised remuneration schemes
Many of the contractors that entered into a disguised remuneration scheme (particularly those working in the public sector) were coerced or falsely advised into it by their employers. There are multiple testimonies from contractors saying they were told by reputable, qualified accountants that the scheme was perfectly legal.
Potential for taxpayer bankruptcy
By being able to backdate tax owed up to 20 years, HMRC are oftentimes demanding older workers or retired people to pay huge amounts of money – so much so that the only option to some would be to sell their house and other assets to pay the bill. Not only is the debt usually an inordinate amount, but the taxman adds interest to the total too. HMRC has declared that it would never bankrupt any contractor, yet there has already been a recognised suicide as a direct result of the legislation.
Gary Colby and the loan charge interest
Gary Colby is a prime example of why HMRC has come under fire for this particular piece of legislation. Mr. Colby, 53 years old, worked as a telecoms contractor between 2012 and 2016. During this time, he provided his services through a contractor agency, who processed his payments via a disguised remuneration loan scheme.
Mr. Colby was informed by HMRC in 2017 that he was to be the subject of a retrospective tax investigation. After requesting to settle his bill with the taxman via his accountant (as advised by HMRC itself), it wasn’t until 18 months later that he received an exact amount owed. Mr. Colby’s final tax debt amounted to £26,000 but he was also charged £2,900 in interest for being ‘untimely’ with payment - he was charged for the year and a half that the investigation had sat with HMRC.
Speaking to The Telegraph, Mr. Colby said: “I want to pay a fair amount of tax but I should be able to have reasonable deductions. They have charged interest but this has been dragging on for 18 months, it’s either complete incompetence or underhand dealings – it’s in their interest to delay.”
An HMRC spokesman stated that ‘charging interest meant that those who paid tax late did not have an advantage over the majority who paid on time, and that delays could also be the fault of third parties.’
HMRC has its cake and eats it with loan charge interest
Ex-HMRC veteran and current Larsen Howie Head of Tax, Andy Vessey ATT, wrote an article back in February that highlighted the irony of HMRC running behind on penalty notices for late tax returns, thus charging even higher fines. Mr. Vessey spoke out about the double standards imposed by the taxman in that piece and raises the same concerns again now regarding the 2019 loan charge.
“This is just another example of HMRC having its cake and eating it when it comes to the loan charge, and indeed any fine for lateness,” he says. “Not only does HMRC drag its feet ever so slowly in quantifying the tax charge but they then have the audacity to charge interest on top.”
“I accept that HMRC has a statutory obligation to charge interest and there is no formal appeal route for disputes about interest,” he continues. “However, HMRC will, in certain circumstances, consider giving up some or all of the interest if a taxpayer objects to the charge or a review identifies that a HMRC mistake or unreasonable delay on the part of HMRC which financially disadvantages the taxpayer by:
- making an interest charge that would not otherwise have had to be paid, or;
- increasing the amount of an interest charge that already existed or was building up.
I would therefore urge contractors in similar circumstances to Mr. Colby to raise such objections as they have nothing to lose by doing so.”