Loan Charge – is it really a tax on ‘loans’?

A tale of two reviews

The loan charge is a controversial and arguably unconstitutional piece of legislation that seeks to impose a tax liability on the legacy elements of a tax avoidance scheme undertaken many years ago. Whilst HMRC is looking to tax such “tails” to tax schemes is not in itself new, the loan charge included several elements that had not been seen before. The consequence of the not one, but two reviews conducted into the charge, also contain elements that are themselves debatable.

The principle behind the charge was to apply a tax to “loans” that had allegedly been made as part of a scheme to avoid tax on payments for working. The theory was that a label attaching to a sum of money could change the tax consequences of that payment.

Debatable arguments

The tax argument is unfortunately unsustainable today and was, in all likelihood, at least debatable at the time the payment was made. Although much was made in the mid and late 2000s of the claimed judicial backing for such “loans” being outside the scope of income tax, the principles of “substance over form” were already well established. Therefore all such payments could and should have been challenged by HMRC.

Part of the problem here is that this basic HMRC function – enquiring into debatable matters – was performed, poorly, inconsistently and seemingly ad hoc.

Some have enquiries, some not. Some have enquiries for some years and not others. Some have enquiries for some schemes and not others. Here therefore we another reason for the loan charge – to hide this incompetence.

On the one hand therefore, those selling the schemes were telling less than the whole truth and on the other, those responsible for verifying (or otherwise) their effectiveness were asleep at the wheel.

Last ditch response

HMRC’s attempts to catch up with the schemes was also hopeless. Legislation against one scheme type in 2008 (when perhaps half a dozen existed); legislation again in 2010, described by the House of Lords as incomprehensible; legislation in 2012, 2014, 2015 and then in 2016, the loan charge – a last ditch catch all.

In attempting to find legislation to capture all manner and types of schemes, inevitably there are gaps and instances of gross injustice created. We have over 150 schemes in our libraries and whilst we can and do categorise them into perhaps five or six types, there are significant differences. Can the loan charge legislation we see cover them all? No.

Defining ‘intent’

HMRC is therefore reliant upon the “intent” of the law applying. The report from Sir Amyas Morse was as much an attempt to define that “intent” as anything else.

On the whole it did. It found areas in which the intent and operation of the law varied and suggested remedies. All but one of those remedies were accepted by the Government and included in draft legislation. So far, so good.

We know however that not only did the review (and therefore the recommendations) include some questionable items, but also that HMRC has a predilection for ignoring law that does not align with its view of what is “right”. That in itself would be fair if HMRC’s mantra was “the right tax at the right time”. That often quoted term is now though buried in the past.

HMRC’s new dogma is “maximise revenue”.

As such the loss of much of the loan charge’s teeth has forced HMRC to reconsider the terms upon which they can and should offer settlement. In the light of the Government being forced to accept so many changes to the loan charge, one might expect some major concessions. Our view is that this will not happen. We will see some minor tinkering and an obligatory shifting of the start date to late 2010, but otherwise, the reactionary forces within HMRC will resist all attempts to find a reasonable compromise and insist upon “maximise revenue”.

APPG concerns

The report did not satisfy all parties (hardly surprising). The APPG minutes of their meeting on 20th January captures some of their concerns.

They felt that the start date proposed by Sir Amyas (9th December 2010) was “arbitrary”. This is when the legislation now in Part 7A ITEPA appeared. This is the legislation that the House of Lords decided was so complicated that neither “ordinary” taxpayers nor professional advisers could interpret. They also considered that if this was a tipping point, then ANYTHING prior to that date – under enquiry or not – should be removed from HMRC’s enquiries.

The use of “self-employment”, common from late 2010, should be outside the Part 7A amendments as these relate to “employment”, so claims APPG. Here we would disagree with the APPG.

The correct determination of status between “employed” and “self-employed” is not something that can be chosen by taxpayer, HMRC or adviser. It is a question of fact.

We are of the view that often the switch to self-employment was not evidenced by any change in circumstance in the role of the end client. As such, this would be hard to justify.

There are problems around defining “closed and open” years and “reasonable” vs “full” disclosure. The idea is closed years or those with full disclosure where HMRC has taken no action, should be outside the loan charge. We agree.

However, defining those terms will be difficult without Tribunal intervention. HMRC will not be prepared to admit to administrative error which could lead to years being excluded. This remains a problem area and will be for many years.

Some third parties are now seeing an opportunity to acquire the “loans” from their original “owners” and ask for them to be repaid. The APPG described this as being “a deliberate scam”.

Is it really a loan?

This is a Catch 22. If the loans were legitimate and made with due attention to the legal and financial processes required, then there is – prima facie – an obligation to repay it. If that is the case, then perhaps the schemes work/worked as advertised? Perhaps the “loan” really is a “loan”?

If on the other hand, the “loan” was simply a payment of money that had a label attached to it which cannot and could not bear the legal weight of being a “loan”, then the obligation to repay it does not exist.

There is plenty of evidence in the majority of the 150+ schemes we know of to assume that this is the more likely case.

Can the “loan” charge apply to something that is not a “loan”? HMRC will be bound to say it can.

Sir Amyas Morse had the opportunity to say it could not – and failed to do so.

The APPG and their continuing efforts may see this happen.

Our position

Whether by the efforts of the APPG and the lobby groups or by action in tax Tribunal and perhaps UK and offshore law courts, it is IMPERATIVE that the “loans” are shown to be instruments that existed to claim a certain tax analysis, nothing else. This is where we started our defensive strategy five years ago and where we remain today.