Last week, HMRC released an update stating that Sir Amyas Morse, Auditor General of the National Audit Office, was to complete a review of the loan charge. This came as a result of pressure put on the Prime Minister to scrap the legislation, which has been described as unethical across the board. The results are expected to be published mid-November, before the January payment deadline.

Unfortunately, this review may come just a little too late for contractors that have already been affected, both emotionally and financially, by HMRC’s heavy-handed administration of the legislation.

What is the 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 government is now claiming that tax back by adding together all outstanding loans and taxing them as income in one year. It’s retrospective in nature and has been universally criticised since its inception.

HMRC still maintains that it aims to win back £3.2bn of revenue through the loan charge.

Why is the loan charge so controversial?

There have been many prior protests lead by MPs, primarily those that are a part of the Loan Charge All-Party Parliamentary Group, and the Loan Charge Action Group. From High Wycombe MP Steve Baker describing the legislation as ‘a catalogue of human suffering and misery’ during a parliamentary debate to APPG Vice-Chair Ross Thomson deeming a previous loan charge report carried out by the government as ‘nonsensical as it is dishonest’, it seems the Treasury has been avoiding the repercussions of the loan charge.

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 is 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 have been recognised suicides as a direct result of the legislation.

How will this loan charge review be different from previous ones?

The review will consider whether the loan charge is an ‘appropriate way’ of dealing with those that entered into ‘disguised remuneration’ schemes. It will also look into the emotional and financial implications of the loan charge on affected contractors, and consider the ‘impact on wider taxpayer fairness’, as well as HMRC’s ‘ability to tackle tax avoidance effectively in the future’.

Despite the review being touted as ‘independent’, it will still include HMRC and Treasury officers, though campaigners hope that the review will include evidence from those affected. The same points were examined in the previous report carried out last December to no avail; hopefully, with the tenacity of the LCAG and the APPG, this report will be taken more seriously.

As reported by the Financial Times, Steve Packham, spokesman for the Loan Charge Action Group, said: “Many vulnerable people [are] placing their hopes on some long overdue genuine scrutiny of the whole loan charge scandal so this must be done properly, independently and thoroughly and Sir Amyas Morse must be allowed to do such a review independent of the Treasury and HMRC, both of whom are up to their necks in the loan charge scandal.”

What should contractors affected by the loan charge do now?

While this review is a triumph for campaigners, many are disappointed that the loan charge hasn’t been put on hold until the verdict of the review is published.

While the review is being conducted, the loan charge remains in force. Those that have settled with HMRC should continue paying their agreed instalments, as specified in guidance released by the Treasury. People who have not settled with HMRC still need to meet a deadline to supply information by 30/09/2019, or they may fall foul of a penalty charge.

It’s also crucial that contractors avoid any other tax avoidance schemes purporting to be legal. Ex-Qdos and current Larsen Howie Head of Tax Andy Vessey ATT warns clients of this regularly.

“HMRC wants anyone involved in one of these schemes or arrangements to make a swift exit and settle their affairs with the department, thereby cutting their losses,” he says. “With any tax avoidance scheme, extreme care should be taken before rushing in. Scheme promoters may instil confidence in users and potential users that their arrangements are watertight but independent third party advice should always be sought. Such professional advice does not come cheap but it may well save an individual money - and an awful lot of stress and heartache - in the long run.”

You can report any emails or promotional material about a tax avoidance scheme to HMRC in a number of ways - more details can be found here.

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