Thousands of workers are hit with massive tax avoidance bills as the 2019 loan charge legislation comes into play.
Earlier this month, MPs took a holiday from the Brexit debacle to consider HMRC’s approach to the new loan charge legislation following a highly critical report by an All Party Parliamentary Group’s (“APPG”) into its conduct.
A loan charge scheme, in short, is when people have their salary paid in loans instead of being paid in the usual way. Normally, you would have to pay the loan back, however, these loans are paid to people in such a way that means it’s unlikely that they’ll ever have to be repaid and therefore tax is not paid on the income.
These schemes were sold by tax advisers who received a substantial commission from their promotion. As a firm, we were approached by one of the promoters of such a scheme to provide an introduction to our clients. We made a unanimous decision against doing so as at the time it seemed too good to be true, and it has indeed proven to be so.
HM Revenue and Customs (HMRC) is now encouraging people who used this scheme to come forward and settle their tax affairs before the charge comes into effect on 5 April 2019.
However, the steps taken to counter the tax advantage that these schemes provided have been criticised for a number of reasons:
- Firstly, HMRC originally seemed to endorse them and frequently engaged contractors who were being remunerated through a loan scheme.
- Secondly, it’s use was frequently a necessary condition of getting a contract, especially in the public sector including HMRC.
- Finally, the legislation has doubled the length of time that HMRC can go back and reclaim tax. The charge will apply to all loans made since 6 April 1999.
The APPG looked at how HMRC was behaving towards this legislation and concluded that “There is a clear risk to the mental welfare of people facing the charge, and there had already been a number of suicides attached to it. There will be many bankruptcies as a result of the charge.”
“The original impact assessment carried out by HMRC and the Treasury was flawed to the point of being negligent. Contractors were frequently forced to use them, especially by employers in the public sector such as HMRC.”
“The charge is retrospective. The real reason for the legislation was to bypass normal legal process and enabled HMRC to collect tax that was “out of time”. HMRC and the Treasury waged a cynical campaign of misinformation towards the public.”
The APPG concluded that “HMRC’s conduct with regard to the loan charge indicates that it is an organisation out of control, urgently needing better and proper scrutiny and genuine accountability”. Perhaps someone should remind MPs that it is they who make the rules.
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