LONDON TAX NETWORK (LTN) LTD - WRITTEN EVIDENCE (LCF0003)
Introduction
My name is Mala Kapacee, Director of London Tax Network Ltd a tax investigations specialist firm. I specialise in the normal enquiries, compliance checks and fraud cases, where I represent taxpayers who are in dispute with HMRC. Over the course of my career, I have also dealt with a number of Accelerated Payment Notices/Follower Notices and other tax avoidance related enquiries.
Though I keep up to date on progress in the tax avoidance realm (specifically the Loan Charge over the last few years), we do not advertise LTN as a specialist in that area. My experience is restricted to assisting individuals with very specific queries. For example, to represent them in obtaining payment arrangements, reviewing whether tax arrangements are disclosable and whether they are caught by the loan charge (and if so what to do).
The reason the individuals come to LTN (usually referred by Keith Gordon or colleagues who also used avoidance structures) is because I provide a bespoke service. I do not profess to want to appeal the veracity of the arrangements using class action or other judicial approach. These individuals want desperately to settle with HMRC and feel they are unable to do so without professional assistance and individual attention.
In the following, I will take you through a few case studies, which demonstrate how taxpayers are being treated (and how they feel they are treated). I will not be going through merits of technical arguments in relation to Tax Avoidance schemes, just reviewing key points that demonstrate how the loan charge and HMRC actions have affected taxpayers.
Case 1
As a result of the loan charge, this client has a liability of c.£130,000. He came to me for assistance with a time to pay arrangement with HMRC. Since the outstanding liability was in excess of £50,000 I advised that he would need to provide additional information (bank statements etc) and that HMRC would look at his disposable income to see what arrangement they could come to. I advised him that since the figures had been agreed, paying an adviser simply to assist with a TTP may not be the best use of funds. He took some time to consider this and came back to instruct LTN because he didn’t “believe HMRC would treat him fairly”. This in itself is extremely telling of HMRC’s reputation amongst its “customers”.
The client works in an industry where he earns a base salary for “desk work” and is given bonus payments for “real” work (i.e. his actual job). He described these bonuses as “danger payments” because the work requires a level of personal risk. For most of 2020, due to the Corona Virus restrictions, this client was unable to work. Having had sight of his bank statements for a few months mid year, I can confirm that all of his income is spent every month – he is literally working pay-check to pay-check to keep a roof over his family’s heads. His wife has had to take up two jobs (which again at the date of writing have not started) and as such 2021 is going to be about making up for 2020.
Despite the hardships and incredible stress of 2020, the client had his 2018/19 return filed by 30 September 2020 and instructed me regarding the TTP agreement shortly after. At the date of writing, HMRC have not yet processed the return. Every officer I have spoken to say that the client cannot set up a time to pay arrangement because there is no outstanding debt but that he can “make payments on account” if he so wishes. I can only imagine how frustrating it must be to hear this as a taxpayer when you have clearly stated to every person you have spoken to (after getting passed round many different departments) that you need to arrange a TTP agreement (i.e. financial difficulties!)
Since HMRC have open enquiries in relation to this client, the return is passed to the compliance team dealing with the enquiry. I was told by an HMRC officer that I can email the compliance team “but they won’t respond” and that they “don’t have a [telephone] number”. In the meantime, the client is incredibly stressed as he has no idea when he will be called on to pay the money or whether a TTP agreement will be reached.
This person has said that “I have been in touch with others in my position, and also the Loan Charge Action Group and APPG, and I know how desperate people have become because of the Loan Charge. My own experience is that I am now reliant on anti-depressants to help me cope. The suicides that occurred as a consequence of the Loan Charge have been met with a distinct lack of empathy from anyone representing the Treasury or HMRC. Despite some positive coverage in the Press and on TV and radio, the wider public has little sympathy, as we are all seen as tax dodgers. All the while, the promoters of these schemes are left unmolested, and as seen recently, some have benefited from their close relationship with government ministers by receiving highly profitable PPE contracts. I believe that we are seen as low-hanging fruit as we are much easier to target than the providers of “disguised remuneration” schemes, which continue to this day.”
My experience in tax investigations corroborates this point. The majority of people I deal with have made mistakes or were badly advised. Regardless of behaviour, HMRC take the same approach whether a
person acted deliberately or not and this is difficult for innocent people to understand or accept. Motive is an essential part of law but HMRC seem to be skating over this point in an effort to appear to be seen to be “clamping down”. Given the evidence, I would suggest that public perception appears to be more important to the Government than “fair” treatment.
I would also highlight at this point that I believe the issue lies within the system, not the individuals. Inspectors who attempt to be commercial and treat taxpayers fairly are often hamstrung by what they are expected to do by their seniors. Conversely, some officers are not well-trained, which leads to extremely poor customer service – again, an issue with the internal training system, rather than the individuals.
Case 2
I have had some individuals come to me who used to be represented by Mr Phil Manley, an ex-HMRC inspector who moved to the private sector. Over the last few years, he was very active in the Loan Charge
arena, actively promoting his expertise in assisting individuals to obtain settlements with HMRC. Having seen some of the communications between Mr Manley and his clients, it is clear he was holding himself
out as an expert in this field. As you may know, on 30 September 2020 (the deadline for settlement for a number of people), MR Manley closed his company and to all intents and purposes, disappeared.
As a result, these individuals missed the settlement deadline and were left unable to use the November 2017 settlement terms.
The client in question moved to be represented by Mr Manley after he and his colleague were given settlement offers from HMRC on different terms – my client was given a settlement offer without a deduction for expenses and including National Insurance Contributions, his colleague was given an offer without NICs and provided with the deduction for expenses.
As soon as he realised Mr Manley would not be assisting further, the client submitted an offer to HMRC based on the same terms as his colleague who:
November 2017 settlement terms); and
The offer from my client was essentially a copy and paste of his colleague’s offer letter, with personal information and loan amounts changed. My client also notes that he is aware of at least one other
individual who was given an offer on the same terms as his colleague and we are unaware of any reason why my client is being treated differently.
Further, on the same day the offer was submitted (30 September 2020), the client called HMRC, explained what had happened and the terms of the offer and was told it would be rushed through. That evening, he
received revised calculations from HMRC which included the NIC and did not provide any deduction for expenses. The “revised calculations” were exactly the same as the original offer, which included the NICs and excluded the deduction for expenses. The client notes that HMRC “are not looking at evidence at all when you submit [settlement offers]” and if they were applying their own rules correctly, then he would not be in this position.
The client then appealed to HMRC advising them of the failure of his adviser and that he did not agree the figures. HMRC responded that the November 2017 settlement terms do not apply and that they “can only
extend the deadline if a customer was unable to settle in time because of exceptional reasons beyond their control.”
Of particular interest to me in reading this is that HMRC are still quoting “exceptional” rather than “reasonable excuse” as stated by legislation in relation to missed deadlines. My view is that reliance on an adviser who clearly, consistently and forcefully highlighted that they were working on the case and that they had sufficient expertise (being ex-HMRC) is certainly a reasonable excuse, particularly because these individuals did not just “leave it to their adviser” but actively tried to move things along and were in constant contact with him. What more could a (non-tax) person have done?!
This client instructed me to appeal HMRC’s decision. I advised that I could do so on the basis of a) fairness (per HMRC’s charter), b) reasonable care (rather than “exceptional” circumstances and c) the original figures being incorrect (since the rejected offer letter had been on the same terms as those for another person).
Before I prepared the letter, the client confirmed that he and his colleague were both dealt with by the same accountant (before he moved to Mr Manley) and that both had the (same) relevant information disclosed to HMRC previously and at the same time. The only difference between the two was the different offer letters from HMRC, at which point my client decided to be represented by Mr Manley due to his purported expertise.
I have prepared the appeal letter but sadly, I have to say my hopes are not high. If HMRC accept that it was reasonable for my client to have relied on Mr Manley then they would (in theory and correctly) have to say the same to everyone he represented in the interests of fairness. If my experience of HMRC’s system were that each individual is treated fairly, then presumably this argument would never have arisen.
Case 3
In 2011, this client (a freelance worker) was being persuaded to use payroll arrangements designed and established by a Chartered Accountant. Before entering into the arrangements, the client went out of his way to satisfy himself it was all above board. He was at that time given very specific assurances from the Chartered Accountant that the arrangement “complies with UK tax legislation” and was “anodyne without a “tax avoidance” (HMRC words) motive involved”. I have had sight of the letter and it is clear that the use of “HMRC” in this context easily gives the impression that the arrangements had HMRC approval.
In the months following, having seen some adverse press coverage on the topic of ‘tax avoidance’, the client sought further comfort and received reassurances culminating in him being given a copy of a mid-2012 letter written to the scheme promoters by HMRC’s ‘Anti Avoidance Group (AAG)’. The letter stated that following responses to HMRC’s queries, the AAG officer was “able to agree that this Hallmark does not apply and as a result the arrangements are not disclosable”.
I have had sight of the letter dated 20 June 2012 from the HMRC Anti-avoidance Group (Intelligence).
A few things can be clearly inferred from this:
1) HMRC were aware of the arrangements;
2) HMRC had reviewed the arrangements and in sufficient detail to have asked questions;
3) HMRC did not consider that the arrangements should be disclosed since the Hallmarks of a tax avoidance scheme were not met. Arguably, it can also be inferred that therefore HMRC did not consider this to be an aggressive tax avoidance scheme that would fall foul of legislation.
4) Contrary to all HMRC’s marketing against avoidance schemes, they could be said to have approved this one.
5) The letter effectively confirms the Chartered Accountant’s claim that at the time, the arrangement “complies with UK tax legislation”.
6) The client carried out due diligence on the arrangements and based his decision to continue using them on the basis of reassurance from HMRC (albeit it was not addressed to him directly).
7) Despite having reviewed the arrangements, HMRC did not notify affected taxpayers of any concerns e.g. that the arrangements did not work and additional taxes would be due. This is another reason the client continued in the arrangements; knowing that HMRC had reviewed the arrangements and not reverted to taxpayers directly, he and other taxpayers could easily infer tacit approval.
In December 2013, HMRC raised an enquiry into the client’s 2011/12 personal tax return – specifically his use of the arrangements – and the client immediately withdrew from them. It was only at this point, and at no time prior, that HMRC first notified the client they were in any way concerned as to the legitimacy of the arrangements. The enquiry officer pointed out in a letter dated September 2014 that HMRC had “already reviewed the arrangements and [had] agreed that they [did] not fall within the DOTAS (Disclosure of Tax Avoidance Schemes) regime. HMRC have not agreed that the arrangements are acceptable from a tax law perspective.”
There is a technical difference between whether arrangements should be disclosed and whether they are acceptable from a tax law perspective. Clearly, HMRC were aware of the scheme in 2012. They made enquiries, received responses and confirmed the scheme was not disclosable. Why did they not point out then that the arrangements were artificial and would not be accepted in future?
Either they simply looked to respond to the question they were set and looked no further, a terrible “customer service”, or, much more likely, they didn’t know that in the future, the arrangements would be deemed artificial.
In regards to the first reason, tax advisers who simply responded to the question set without looking further would almost certainly end up in professional negligence claims and out of business. In regards to the second…. If HMRC did not know the arrangements were artificial at that point, how could the taxpayer?!
Further, having said that the scheme was not disclosable, is it then “fair” to have as part of the Loan Charge protection, that “where a reasonable disclosure of the use of the tax avoidance scheme was made to HMRC and HMRC did not take action”, then the taxpayer is not caught.
The client wrote to HMRC in July 2019, with various queries relating to the arrangements, including that as employment contracts clearly stated all due PAYE would be deducted from monies he received, why was he on the hook for the Loan Charge, when according to tax law, PAYE operation is the responsibility of the employer (unless the employee was complicit in tax not being deducted)? For the avoidance of doubt, there has never been any allegation that the client knew the employer was not deducting PAYE.
The client did not receive a response from HMRC and wrote again on 25 September 2019. The letter was sent by tracked delivery and received by HMRC on 28 September 2019. My client did not receive a response until 10 September 2020 (the dates are correct, it took HMRC nearly a full year to respond).
In the email response, the officer advised that due to time constraints and the approaching settlement deadline, his “full response will not be pulled together until after the 30 September 2020”. To date, a “full response” has not yet been received. Suffice to say, this level of “customer service” is not good enough. For an issue as contentious, sensitive and life changing as the loan charge, a one year response time is atrocious.
Again, I have had sight of the email from HMRC and there are certain areas I wish to bring to the committee’s attention:
1) Regarding the PAYE point the officer states that the “marketing for the scheme very specifically stated that you were not an employee and that [xxx] would not deduct tax”. Regardless of interpretation, HMRC appear to be doing exactly what the taxpayers did; relying on the documentation provided to determine the workings of the arrangements. Yet when it comes to whether the arrangements are aggressive avoidance, HMRC suggest that taxpayers should have looked beyond what they were given. There is a definite mismatch as to the standard of knowledge HMRC hold taxpayers to and what they show themselves;
2) In reference to the June 2012 letter where the AAG team member confirmed the arrangements were not disclosable, the officer replied “I note the AAG letter re the hallmarks, and can only comment that, after a discussion with this team, we both agree that this letter is incorrect”. This individual relied on a letter from HMRC confirming that the arrangements were not disclosable. Now that HMRC have simply changed their minds, the client is caught by the loan charge.
This individual was not relying on HMRC guidance and he wasn’t relying on a clearance from HMRC based on a version of the facts that changed on implementation. The June 2012 opinion from HMRC was based on the exact arrangements that he undertook, simply by virtue of being part of a “one size fits all” arrangement.
My view on this is that the client should go to Judicial Review on the basis of unfairness. However, he has advised that he paid £6,000 in professional fees to deal with his case, £6,000 that he “could ill afford”. The client simply wants the issue to be settled and fails to understand why HMRC should feel it in any way appropriate to pursue him for retrospective taxes spanning the period mid-2012 (when the AAG
determined the arrangements were not disclosable) through to December 2013 when the client was finally notified of HMRC’s concerns.
The client is unable to find another example of where one party would be liable for the financial cost of another party’s admitted error.
If HMRC had reviewed these arrangements and issued the 2012 letter, how many others have they dealt with in the same way? And how many other individuals are either unaware of the letter or unable to afford justice?
Case 4
This case study relates to a person caught by the disguised remuneration rules, rather than the loan charge, though HMRC raised assessments before the loan charge came in on 5 April 2019.
The client was referred to me because she was being made bankrupt for a tax debt as a result of contractor loans and she had no idea what to do. The client had taken part in disguised remuneration arrangements in 2008/09, 2009/10 and 2010/11. She left the UK in 2012, returned in 2014 and then left again in 2016 due to personal issues. When she came back in March 2020, she had been locked out of her house by the trustees in bankruptcy.
The client only found out the reason for this when she filed a Subject Access Request in August 2020 for all the correspondence that led to this point. I directed this person to TaxAid in the hope that they could use their fast track access to HMRC to reduce the assessments prior to a bankruptcy hearing. I have however been copied in on a number of emails and have even received a suicide note from the individual.
HMRC asserted that they had opened an enquiry and then raised assessments in 2013 which advise of the time limits for appeal. They confirmed they had tried to deliver the assessments to the overseas address but that the assessments were returned, however I have not seen the evidence for this. The assessments to the UK address were to a property the client advised she has never lived in. The assessments were calculated by assuming that the individual was an additional rate taxpayer for the periods in question. The client has never earned over £50,000 and her tax returns would have shown this.
The reason I am including this person in the case study is to demonstrate HMRC’s handling of disguised remuneration cases and there are a few points I want to highlight:
1) The assessments may have been sent to the wrong address;
2) The assessments were very clearly calculated at the incorrect tax rates. If they had been calculated at basic rate, the tax liability would have been cut to one third of what it was. On being provided with bank statements showing the loans received, HMRC comment that “whilst the loan amount received into this account is clear and supports your position, we would be unable to displace assessments based solely on this information and would require statements from the other accounts...or your confirmation that this was the only account you held”.
HMRC have a duty to taxpayers to ensure assessments are raised to the best of their knowledge based on the information they had at the time. They had a copy of the client’s tax returns and at no point have they queried the amounts on there. Therefore, they had no reason to have used the additional rate of taxation. Further, they receive information from UK banks and the officer would have been able to determine whether the individual had additional accounts, rather than
requesting her to essentially prove a negative. They could also have applied to the FTT for a third party information notice requesting the information, before starting bankruptcy or as part of the proceedings.
3) HMRC instigated bankruptcy proceedings on the basis of incorrect figures and at no point did the Trustees in bankruptcy seek to challenge the figures or assure themselves the figures were correct. Any creditor to a Bankrupt’s estate must provide proof of debt to Trustees in Bankruptcy
(provided certain conditions are met). It appears that for HMRC to make someone bankrupt, they do not need to show the debt is correctly calculated, only that HMRC consider it is due. This again I believe is a failure in the justice system.
Following numerous emails between the client and HMRC, the 2010/11 figures have been reduced from c.£43,000 to c.£2,500 (plus interest and penalties) within a few months. The client has also advised that her income in 2008/09 was c.£11,000, not £42,000 as estimated by HMRC.
The system has failed the taxpayer in this and possibly other cases in the sense that no-one challenged HMRC’s calculations. This person is on the brink of losing their home because they were incorrectly served with incorrect assessments and no-one in the process thought to check or
challenge HMRC.
Ironically, it appears that where information is given by HMRC, taxpayers and courts think it is correct, yet when it comes to relying on their guidance, HMRC say it is simply guidance and should not be relied upon. Particularly for taxpayers who cannot afford advice, what are the
options?
4) Before instigating bankruptcy, at no time did a person from HMRC seek to contact the individual by phone. I recommend that this is made mandatory, particularly when the individual attempts to engage. The mental health impact of such an aggressive approach by HMRC is immediately apparent to those of us trying to assist taxpayers through this minefield and if HMRC become aware of it, perhaps they would temper their approach. (I am assuming they are unaware of it because to proceed with such draconian measures knowing the impact is unconscionable).
This individual has undergone horrendous personal experiences and has two children to protect. She was so desperate, she contemplated suicide. The individual has kept me cc’ed on a lot of emails even though I do not represent her and they clearly show that she does not understand why she is being penalised for taking part in tax arrangements, why the figures are wrong, why HMRC “ignored her” but continued to communicate with the Trustees in Bankruptcy. It is only recently that she has been able to open a channel of communication with HMRC mostly it appear due to her own tenacity.
The emails demonstrate a very high level of frustration and distress. HMRC’s responses are technically correct but they do not show any amount of empathy or willingness to work with the individual, they almost look like scripted replies. Some might suggest that this is how HMRC must respond to perhaps keep their dealings with all individuals the same and “fair”. If this is the case, I refer you to case 2 above, where clients with the same issues are being dealt with completely differently.
Certain parts of the emails I consider are particularly important:
From the taxpayer to HMRC “I wish you could please respond to emails quicker as the courts don’t work with HMRC timelines”. HMRC didn’t turn up to one of the court hearings regarding the bankruptcy and the client incurred significant cost borrowing money from a friend’s to obtain representation. This is to me demonstrates a complete lack of empathy and respect for the individual in question and to the taxpaying public as a whole.
On 23 October 2020, HMRC wrote “I’m sorry to hear of the difficult personal circumstances you find yourself in. We understand that facing a large tax bill can be stressful and we are committed to supporting you through the process”. On Friday 6 November 2020, HMRC wrote in response to another email “it is HMRC’s intention to add amounts due for Stamp Duty to your liability.” Again, a clear demonstration of the lack of empathy and commerciality. Given that the client has no funds to pay the liability (and only part owns the property being sold, there is a question over whether the income tax will be paid, let alone any additional stamp duty).
The client has queried “Why should HMRC punish people who have unknowingly got into this mess? Why are you not targeting the people who made money out of it...these arrangements have fees is [sic] up to 15-25%, that means I already contributed to NI/Tax but these people have taken [the money] and made a run [for it].” Questions we are all asking.
Importantly, this individual is not refusing to pay the tax that is legitimately due, she is at a loss to understand why it has been dealt with so aggressively. She makes the point that “what benefit will HMRC get if I am unemployed? I have to claim Universal Credit as I am not getting a job as I fail credit checks [due to bankruptcy]...Instead if I am in a job, I would have been able to pay tax and the retrospective tax amount too?”
HMRC’s heavy-handed approach is doing serious long-term damage to people’s faith in the system. And, as this client points out, may well mean we have more people claiming benefits as a result. Some clients are looking to pay HMRC over 30 years, effectively, a lifetime of debt and no savings for retirement or no retirement at all.
The examples above demonstrate that HMRC have been aware of the legislation for a number of years and had even looked into the arrangements in detail, corresponding with the promoters. It throws doubt on HMRC’s assertions that “HMRC's firm view [has always been]...that these type of arrangements do not work” and ultimately erodes any trust between the taxpayer and the department.
A lot of people were blind-sided when they were abandoned by Mr Manley. Normally, when taxpayers miss a filing deadline, the sudden illness of their adviser counts as a reasonable excuse providing the taxpayer did everything in their ability to file as soon as possible. In these cases, HMRC are still quoting “exceptional circumstances” despite tribunals having clearly stated that a reasonable excuse does not necessarily mean the situation had to be exceptional. What they also seem to be ignoring is that so many of these individuals engaged Mr Manley because they could not deal with the matter themselves, being under considerable mental strain from the thought of the debt, let alone the events of 2020.
A few points regarding enquiry process and LC legislation
The fact that the loan charge does not close enquiries is another source of concern to taxpayers and advisers alike. As an adviser, it is incredibly frustrating to be unable to tell a client how long it might take to close an enquiry, what HMRC are likely to do or how to respond. People are going bankrupt to pay HMRC and yet they may now be asked to pay (e.g.) inheritance tax and potentially repay the loans as well.
Regarding the legislation itself, as I am sure you will have heard from others, the fact that tax is still due if the loans are repaid is counter-intuitive to say the least. If the loans are repaid then clearly they were not salary so no tax should be due (in the same way as s.455 charges on companies are applied/repaid).
If loans are written off, this is a “relevant step” and more tax is due. No-one has yet been able to explain how this makes sense if the income tax and National insurance contributions have already been paid. As a result, affected taxpayers are boxed into a corner and have no place to turn.
Overall, the LC legislation is inherently unfair and unfit for any purpose other than media headlines and driving money to HMRC (as with APNs/FNs). This, dare I say it, haphazard drafting of legislation erodes trust not only in HMRC and the system but also in advisers. There are some who say this is part of HMRC’s aim, with Making Tax Digital for example, however they seem to have forgotten that we are the ones who
help taxpayers get things right. Tax advisers are essential to keeping the UK as one of the most tax compliant jurisdictions in the world and by making our lives difficult, HMRC may be shooting themselves in the foot.
Tax is necessary for a society to be run effectively and to provide care and services for those who need it. All of the people I have spoken to in relation to the Loan Charge, agree that had the legislation been prospective, they would have changed how they operated. They would
have come out of the arrangements because it would have been clear that they were illegal. Changing legislation “at will” to suit a Government department because they failed to act within the rules at the time (i.e. opening enquiries and raising assessments) is a very quick way to kill any trust in HMRC and by proxy the Government.
The individuals affected are likely now to be looking at any way they can to take advantage of all the benefits they can from HMRC. Where before they may have forgone state benefits because they didn’t need them, they will now be looking to take everything they can get because they need it. And people will suffer. Society will suffer. If HMRC were an organisation run by those whose work is finance, not politics and whose salaries were directly linked to “customer satisfaction”, I think we might see things handled differently.
For a Government department that is “committed to improving its customer experience”, promises “accurate, consistent and clear information” and wants to ensure that “the people [we] deal with have the right level of expertise”, HMRC is clearly failing. No business (charitable or otherwise) would survive if it was managed in the way HMRC is being managed.
10th December 2020
London Tax Network Limited|41 Great Portland Street, London, W1W 7LA
tel: 07783 236 845|web: www.londontaxnetwork.co.uk
Registered in England and Wales|Company no. 11918717