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Loan charge under review: Cross-party group of MPs slams government inquiry into tax policy

The government’s independent inquiry into the loan charge disguised remuneration policy has been criticised in a report by a cross-party group of MPs for being ‘fundamentally flawed’

A cross-party group of MPs claims to have uncovered evidence that the conclusions of an independent inquiry into the government’s controversial loan charge policy were based on a potentially skewed interpretation of the evidence supplied to it by various tax experts.

In its 64-page review of the Sir Amyas Morse independent inquiry into the policy, the Loan Charge All Party Parliamentary Group (APPG) formally disputes its finding that the “law became clear” on the use of loan schemes from December 2010.

This is on the back of responses it received from tax experts who participated in the evidence-gathering stage of the Morse review’s creation, the majority of whom told the APPG that they did not believe the “law became clear” about loan scheme use at this time. 

Thousands of IT contractors who previously enrolled in such schemes have found themselves saddled with life-changing tax bills as a result of the loan charge policy being introduced by the government in November 2017.

The policy was pitched at the time as a means for HM Revenue and Customs (HMRC) to recoup the £3.2bn in previously unpaid employment taxes it claimed 50,000 individuals avoided paying by opting to be remunerated for the work they did between 6 April 1999 and 5 April 2019 in the form of non-taxable loans.

In HMRC’s opinion, these loans were never intended to be repaid and so should have been classified as taxable income. An amendment was therefore added to the Finance Act in 2017 that made it possible for HMRC to demand contractors pay the tax the agency claims they avoided during this 20-year window.

However, following the publication of the Morse review in December 2019, a decision was taken to shorten the look-back period for the policy by 11 years, so that it only applies to individuals who participated in schemes between 9 December 2010 and 5 April 2019.

As previously detailed by Computer Weekly, the selection of 9 December 2010 as the new start date for the policy has proven controversial, with the review claiming the legal position on using loan schemes became clear following the publication of the Finance Bill 2011.

The Morse review further claims this date loosely coincides with when HMRC began to “consistently articulate” its view that loan schemes do not work.

“While the position of loan schemes before 9 December 2010 is disputed, the view of most tax advisers and professional bodies we heard from is that the 2011 legislation is effective in ensuring that income paid through loan schemes is subject to tax,” the Morse review, published in December 2019, stated.

“The evidence given to the review was consistently that once the new legislation was introduced, reputable advisers advised clients against using a loan scheme. In short, their view was that, following the 2011 legislation, schemes entered into on or after 9 December 2010 would clearly generate an income tax consequence.”

This conclusion has been widely disputed since the report’s release by tax experts and IT contractors who participated in loan remuneration schemes around this time, who claim the law was anything but clear in 2010.

The APPG review, which is based on written evidence and testimonies shared by contractors caught in the scope of the policy during two witness sessions, goes one step further in its criticism of the decision to make 9 December 2010 the start date.

The APPG contacted all of the tax experts who supplied evidence to the Morse review to see if they were of the view that the law on using loan schemes became clear in 2010, and – it claims – the majority of those questioned were “adamant” it did not.

“Although there is some consistency in the feedback provided to the APPG, in contrast to the key findings of the Sir Amyas Review, the evidence overwhelmingly shows that most respondents disagree rather than agree with the [law became clear] statement,” the APPG review states.

The Loan Charge APPG report calls into question just how independent the Morse inquiry actually was, given that it was drawn up with the support of HMRC and HM Treasury, each of which play respective roles in enforcing the loan charge and overseeing it as a policy

“Nine of the 13 respondents provided a comment, and six of the nine respondents who did provide a comment disagreed with this statement. Only three of the nine respondents who provided a comment answered that they agreed with the review that the law was clear that ‘all’ loans were taxable after 2010.”

The report’s release comes on the same day as a backbench debate in the House of Commons is due to take place, which centres around the APPG’s ongoing work to have all retrospective elements of the loan charge legislation scrapped.

It is expected the debate will also see representatives of the APPG reiterate their past calls for the policy to be made prospective from 16 November 2017, which is when the version of the Finance Bill it featured in achieved Royal Assent.

The Loan Charge APPG report also calls into question just how independent the Morse inquiry actually was, given that it was drawn up with the support of HMRC and HM Treasury, each of which play respective roles in enforcing the loan charge and overseeing it as a policy.

Labour MP Ruth Cadbury, who is one of the Loan Charge APPG’s three co-chairs, said in a statement, released in tandem with the report: “The Loan Charge APPG expressed our concerns about the remit of the Morse Review and the fact that HMRC staff worked on it, and it has come up with a conclusion which is simply not sound.

“The reality is that the Morse Review recommendations simply do not properly resolve the loan charge scandal and still leave thousands of people and families facing huge and, in many cases, simply unaffordable bills for tax that has never been legally proven to be due.” 

Morse inquiry under review

The original aim of the Morse review was to assess whether or not the loan charge policy constituted a proportional response on behalf of the government in trying to clamp down on tax avoidance and disguised remuneration within the self-employed sector.  

It also made a series of recommendations that the policy should be tweaked in various ways, in acknowledgement of the financial hardship and distress it is known to have caused, given the policy has been linked with at least seven suicides to date.

The headline recommendations made by the review include effectively cutting in half the length of time the policy covers, so that it now runs from 10 December 2010 to 5 April 2019, and introducing exemptions for individuals who declared their use of loan remuneration schemes to HMRC at the time.

However, the APPG review also said the Morse inquiry’s recommendations do not go far enough, given that 40,000 individuals are still within its scope, and the ones who are no longer covered by the policy are living in fear that they could still face enforcement action from HMRC at a later date.

Liberal Democrat and Loan Charge APPG co-chair Sir Ed Davey, said the contents of its review hammers home the need for the government to “do the right thing” and make the loan charge policy prospective as soon as possible.

“Our report exposes the fundamental flaw in the Morse report and confirms the widely shared view that the loan charge is retrospective and therefore unfair,” he said.

“Expert advice given to our committee showed that the reality of the law, the court cases and even the stance taken by HMRC itself means it is simply not credible to claim that the law was clear from 2010.”

Computer Weekly contacted HM Treasury for a response to the report, but the department declined to comment.

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