HMRCSR0018
Written evidence submitted by the Loan Charge & Taxpayer Fairness APPG
The Loan Charge and Taxpayer Fairness APPG
The All-Party Parliamentary Loan Charge and Taxpayer Fairness Group (APPG) is an All-Party Parliamentary Group comprising Parliamentarians of all parties from both Houses of Parliament. Members of the APPG have concerns about the nature and impact of the Loan Charge and they also have concerns about the wider context of fairness of tax legislation and about HMRC’s conduct in enforcing it. The APPG’s website is http://www.loanchargeappg.co.uk/.
The Loan Charge and Taxpayers Fairness APPG has 255 members, making it one of the largest All Party Parliamentary Groups and there continues to be very considerable concern about the whole approach and the devasting impact it is having on people, but also concern about HMRC’s performance and conduct in relation to the Loan Charge.
This is a short submission to the PAC Inquiry, HMRC Standard Report 2022-23
Background
The Loan Charge was introduced in 2016 and came into force in 2019. It has been a profound failure as a measure, as its stated aim was to stop the ongoing promotion and use of ‘disguised remuneration’ schemes. It emerged through responses to Freedom of Information requests that it was HMRC who conceived the idea of the Loan Charge, not the Treasury. HMRC developed the idea of the Loan Charge and proposed it in advice to Treasury ministers in September 2015 – this is confirmed in FOI2018/00884 where they admitted that they “developed the loan charge in response to the government’s priority to tackle tax avoidance, including the use of disguised remuneration (DR) schemes” and “proposed the loan charge in advice to Treasury ministers in September 2015.” This exposes the fact that HMRC conceived and introduced the Loan Charge because, as above, legal cases did not give them the direct right to pursue employees and because they had consistently failed over so many years to either stop these schemes or to adequately warn people not to use them.
This also means that HMRC cannot claim that they do not bear responsibility for the impact and operational mess of the Loan Charge, as it was HMRC’s idea. We believe that there needs to be much more transparency and scrutiny of HMRC Customer Strategy and Tax Design department and the overall way HMRC writes and recommends policies to the Government.
The Loan Charge is profoundly unfair, as it retrospectively changes the position for thousands of taxpayers and allows HMRC to pursue them where otherwise they would legally not be allowed to do so and allows HMRC to issue bills for legally disputed tax and denies the basic right of taxpayers to properly challenge HMRC in the tax tribunal system. It is also draconian and dangerous, demanding not only maximum income tax on the disputed sums (on the basis HMRC has deemed the loans to be income, despite never legally proving this) but also inheritance tax on the basis that they are loans (when they cannot be both income and loans). When interest is added (including for years HMRC failed to take any action, including failing to even open enquiries in many cases) and penalties (for previously disputed and unsubstantiated HMRC issued Accelerated Payment Notices) the sums being demanded are not only unfair but wholly unaffordable for thousands of people affected.
HMRC also failed to act properly at the time they should have done, failing to challenge schemes (despite having real-time information) and failing to warn people they should cease using them or face challenge. Had they done so, the vast majority of people (who had been told by professional advisers that the arrangements were legitimate and compliant) would have ceased using the schemes. This would have avoided the huge and unaffordable bills that are commonplace, even with scheme use for just a few years. Worse still, HMRC signed off tens of thousands of tax returns where scheme use was declared, without opening enquiries, effectively (and legally, without later evidence of wrongdoing) giving approval to the returns.
Perhaps even more fundamentally, HMRC failed to enforce the agency regulations/agency rules. We wrote to the Financial Secretary to the Treasury on this matter on 9th January this year. The rules are clear that most agency workers should be treated as employees and agencies are required to make deductions of Income and Tax and employee NICs and HMRC must seek to recover any tax it believes should have been paid from agencies. This therefore would also have been the case previously, over the last twenty years, as there has not been any change of the law that has altered this situation or HMRC’s duty to enforce it. If HMRC had policed this sector properly and enforced compliance upon the Agencies, there would have been no need to legislate for the Loan Charge, nor cause all the distress it has caused, because the vast majority of the workers providing their services to recruitment agencies, provide a personal service and as such should have had PAYE Deducted by the Agency at source.
The Loan Charge was supposed to stop and draw a line under the use of what HMRC calls ‘disguised remuneration schemes. It has been a wholesale failures on both counts, as well as being troubling in the way it overrides bask taxpayer rights and protections. At the Treasury Select Committee meeting on Wednesday 18th October, Jim Harra, First Permanent Secretary and Chief Executive of HMRC stated that some 40,000 individuals still faced the Loan Charge, over four years since it came into effect (and seven years since it was brought before Parliament). This in itself shows that the Loan Charge has been a catastrophic failure as a measure, with the matter still being unresolved in 40,000 cases, with HMRC unable to cope and with thousands of people still facing serious anxiety, bankruptcy and breakdown. This contrasts with the predictions made by HMRC of how much money this would bring in to the Exchequer and without any mention of the all too predictable suicides., bankruptcies and family break-ups, all of which have happened.
Our Submission
We wish to highlight seven areas related the Loan Charge, all that have happened over the past year so are relevant to the Inquiry, which need proper scrutiny of HMRC performance:
1. HMRC Administrative Failures, Delays and Errors
There is very considerable evidence, from tax advisers and from people facing the Loan Charge and from MPs constituent casework that HMRC’s performance in administering the Loan Charge has been woeful, with wholly unreasonable delays in replying to taxpayers and advisers and in producing settlement figures and with chronic delays in calculations. This needs proper scrutiny and we hope it is something the PAC will look at.
We have covered in this document sections 6 and 7. We have had a considerable amount of further evidence showing delays and errors since then. Many submissions received by the APPG refer to concerns about HMRC accruing interest on unproven liabilities because of their own delays. Some examples of these submissions can be seen here (10291, 10354, 10545). All submissions are available on the APPG’s website here.
The delays and errors did in many cases make it impossible for many people to reach settlement with HMRC who had wanted to. It is also scandalous that people are charged interest (at significant levels) for periods that have resulted from HMRC delays. Tax law should be changed to stop this.
It is also clear that the delays and errors have been a key factor in causing mental distress, anxiety and depression related to the Loan Charge and HMRC’s pursuit of it. Delays and errors have been cited in cases of serious mental health issues, breakdown and self-harm. HMRC confirmed in January this year that there have been ten suicides of people facing the Loan Charge. They have confirmed this month, in a reply to a letter from the APPG, that there have twenty-four cases of serious self-harm also referred to the Independent Office of Police Conduct of which thirteen refer to attempted suicides.
The delays and errors, that are far too common, should therefore be part of any review into HMRC’s performance.
2. Serious failures regarding vulnerable customers
It is clear from both the internal investigations into the suicides and cases of serious self-harm referred to the IOPC and also from evidence submitted to the APPG that HMRC fails far too often to abide by its own processes with regards to identified vulnerable customers. Vulnerable customers that should have had no contact other than through their adviser have been telephoned or even had an HMRC officer calling at their house. Brown envelopes, something that themselves causes severe anxiety, have been sent when they should not have been.
It appears that in too many cases, different teams/staff fail to communicate or to stick to the protocol, which gives the impression of persecution and vindictiveness to those affected. The APPG has had several urgent and desperate emails about this, in one case with someone threatening to take their own life as a result.
We raised these failures with HMRC recently in a letter regarding their internal investigations into the suicides.
3. The fact that HMRC themselves used contractors who were using schemes now subject to the Loan Charge
We covered this in a report which is here and wrote to HMRC about it here.
The response from HMRC was wholly dissatisfactory and failed to acknowledge the mistakes made; astonishing that HMRC signed off tax returns of contractors using these schemes while also claiming that they have ‘always been clear’ that the schemes never worked.
We have received more information over the last year from contractors who worked for HMRC, declared scheme use and had tax returns signed off, who are now being pursued by HMRC for the time they worked for HMRC. In one case, the period of working was after HMRC has stated it was finally carrying out proper checks, despite HMRC claiming they had checked all contingent workers. In this case, everything had been declared to HMRC and the worker had been recruited by the Government approved process.
4. Misinformation/disinformation and failure to properly answer questions
Since the Loan Charge came to the attention of MPs and journalists, HMRC have engaged in cynical propaganda to justify the Loan Charge and to cover up its clear failures. This has continued over the last year. In numerous letters and in Select Committee appearances, senior HMRC officers have failed to answer questions asked (including regarding HMRC contractors using Loan Schemes) and have given misleading and partial responses. One key area of disinformation has been the way HMRC has routinely answered questions about prosecutions and convictions of loan scheme promoters by citing figures for convictions and custodial sentences none of which have anything to do with the promotion of loan schemes.
We have covered the campaign of mis/disinformation numerous times, this is a list of documents that refer to and highlight this. The failure to properly answer questions and the repeating of discredited and misleading propaganda has continued over the last year.
We wrote to Jim Harra last year seeking answers to key questions related to the Loan Charge, but Mr. Harra failed to answer them factually and in some cases did precisely what he was asked not to do, but to reply with the same, discredited propaganda lines. The letter is here.
We have made the point that we believe that at times the Civil Service Code has been broken.
5. HMRC’s failure to pursue promoters and to shut down schemes and the weakness of new measures announced
Despite HMRC giving the contrary impression, the reality, as exposed by Freedom of Information requests, is that there have been no arrests or prosecutions, never mind convictions, of anyone for promoting or selling the schemes that are now subject to the Loan Charge. There has been a consistent and concerted campaign of disinformation by HMRC and the Treasury to give the false impression that HMRC have taken action against those who promoted the schemes which are now subject to the controversial Loan Charge, when this is not the case. HMRC (especially via their press office) have sought to give a highly misleading impression that they have taken action against loan scheme promoters, so much so that the APPG felt compelled to publish a report in March 2020 exposing this.
HMRC and the Treasury have admitted in an FOI response[1] that they cannot go after promoters of loan schemes as such schemes were not illegal and, ironically, the Financial Secretary to the Treasury has admitted that the government would need to change the law retrospectively to be able to do so.
The reality is that promoters of the schemes now subject to the Loan Charge have not and, it seems, will not face any action from HMRC for promoting the schemes. This is in stark contrast to those to whom they sold the schemes, and from whom they took large fees, some of whom are facing ruin as a result.
The Loan Charge and Taxpayer Fairness APPG has been calling for effective action to stop the ongoing mis-selling and operation of unacceptable tax avoidance schemes and for action to be taken against those who recommended, promoted and operated the schemes now subject to the Loan Charge. The reality is that until now, HMRC has failed with regard to both of these aims.
You might also join the Loan Charge and Taxpayer Fairness APPG in challenging senior HMRC officials, who disgracefully made a deliberate decision not to conduct a review into promoters, because they wanted to continue to target those who were advised and mis-sold their schemes. This extraordinary decision only came to light due to FOI requests, which have exposed so much of the whole Loan Charge Scandal. The APPG wrote to First Permanent Secretary and CEO of HMRC Jim Harra and asked five questions. Mr. Harra failed to answer any of those questions, which is alas typical of the way they and the Treasury have conducted themselves through this whole scandal. You might therefore ask Treasury Ministers why promoters have not been the focus of attention, when they clearly should have been.
HMRC now name schemes and promoters online, as if this deals with the problem. It has recently emerged that under the Finance Act 2021, names are only added for a year, then removed, which is a farce. In any case, naming schemes and operators does nothing to help those hit with life-changing bills for having used them, having been recommended to do so and having been assured they were fully legal and compliant.
HMRC also state they will issue Stop Notices. This again, will have no impact. Any promoter in receipt of a Stop Notice will of course stop that particular scheme, dissolve associated companies and disappear (as has been a common pattern). HMRC is are now proposing “a new criminal offence to apply to promoters who continue to promote tax avoidance schemes specified in a ’Stop Notice’”. Yet a Stop Notice makes it unlawful for a person subject to the notice to continue to promote the scheme subject to the notice only. So HMRC’s proposed new criminal offence for promoters for failing to comply with a Stop Notice will not apply if the same promoter promotes new or different schemes! Another farce! As tax lawyer and commentator (and former member of HMRC staff) Osita Mba said about this, the reality of the proposed new law is “stop cheating the public revenue (and defrauding your clients) with this scheme. But you’re free to cheat the public revenue (and defraud your clients) with other schemes until we ask you to stop!”.
So more tough sounding talk, but utterly meaningless and what is more, once again does absolutely nothing to help those who were recommended and mis-sold these schemes, who HMRC will continue to pursue ruthlessly, regardless of the fact that they took, and followed, professional advice or were duped into using these schemes (and in some cases were obliged to use them by recruiters/umbrella companies).
What HMRC should of course be doing – and could if they really wanted to stop promoters – would be to stop the schemes in the first place, BEFORE they dupe people into using them and later being hit with unexpected and unaffordable bills. That is the only action which is meaningful and is perfectly possible with the Real Time Information they already have , but HMRC have a dreadful record of failure in that regard of failing to shut down schemes, failing to warn people and signing off years of tax returns without raising any issue.
Earlier this year, HMRC began issuing Section 684 notices, transferring the liability for employers/agencies to individuals/employees, however this ignores the PAYE system and is an abuse of their discretion to transfer liability, to cover up HMRC’s own failure to enforce the agency rules and collect tax from agencies. Section 44 of the Income Tax (Earnings and Pensions) Act 2003 deems agency workers to be taxable as employees of the agencies which obliges HMRC to collect tax from employers – be they end clients or agencies – and is instead going after the workers who worked for them. Indeed in the discovery assessment letters issued this year, they admit that employers are liable, but they failed to collect this when they should have done, leaving workers facing life-ruining bills instead. It is notable that one of the end clients who engaged considerable numbers of contractors using loan arrangements was the Government itself, including ironically, HMRC.
How can it be right for HMRC to have signed off their own contractor’s payslips and tax returns at the time, only to claim later they knew nothing about it and have no responsibility? The biggest irony, perhaps, is that the reason so many people became contractors is because end clients – companies and public bodies, including Government ones, were so keen to avoid having to pay employers’ taxes and took on self-employed contractors instead.
6. HMRC’s unfairly taxing payroll loans as both income and as loans
It is quite wrong that HMRC have imposed inheritance tax on the loans, on the basis they were genuine loans, at the same time as claiming that they ‘were always income’. The payments cannot have been loans and income, they can only be one or the other. This needs to be addressed and scrutinised (and outlawed).
Conclusion
There needs to be proper scrutiny of HMRC and some proper accountability. In the view of the Loan Charge and Taxpayer Fairness APPG, there is a significant problem, with the relationship between the Treasury and HMRC. Treasury Minister are supposed to be responsible for overseeing HMRC and holding them to account, however throughout the whole ‘Loan Charge Scandal’, all Treasury Ministers have done is to defend HMRC and repeat HMRC propaganda, including in Parliamentary Questions, rather than answering them. There needs to be proper, independent oversight of HMRC with the huge powers it has and the impact of HMRC driven laws, such as the Loan Charge. As APPG Officers have said many times, HMRC is out-of-control and unaccountable and with the huge (and increased) powers it has, this is a very dangerous combination and one that the current system of scrutiny and accountability is failing to address.
There also needs to be an effective system of scrutiny of HMRC, with proper Parliamentary scrutiny and independent oversight. We believe that this is essential, alongside creating a framework where the Government HMRC can legitimately and properly both close down unacceptable tax avoidance schemes and pursue those behind them.
The Loan Charge also shows serious the flaws in the overall tax system and the lack of basis rights for citizens to defend themselves against an over powerful and out-of-control tax authority. The APPG believes that the Government should introduce a ‘Taxpayer First’ Act (and a Taxpayer Bill of Rights) of the kind that has been implemented in the United States of America, so that as well as properly implementing the tax system and collecting the right amount of tax (according to the law), taxpayers rights are actually built in to the system, in a way they are not in the UK.
As part of this, it is high time that the Government limited the time that tax enquiries can be ‘open’, with enquiries being automatically closed after 3 years, if HMRC has not taken action and if no further information has been revealed (and shared with the taxpayer).
There is a huge imbalance in the tax tribunal system, which HMRC routinely exploits by using taxpayers’ money to fund expensive and in many cases excessive legal representation against individuals and small and medium sized companies. All taxpayers should always have the right to go to a tax tribunal, initially at a fixed cost, for any disputes with HMRC. In addition, to stop the routine practice of HMRC using taxpayers’ money to pay for legal representation in cases against ordinary taxpayers (as opposed to genuine firms/larger companies this should only be allowed where the taxpayer can access funding for representation also. This would also see more cases resolved without the need to go to court in the first place.
October 2023
[1] https://www.whatdotheyknow.com/request/loan_charge_information_provided#incoming-1336224