April 2019 loan charge – ‘If you tolerate this…
…your children will be next’ sang the Manic Street Preachers almost a decade ago.
I don’t think they were singing about the April 2019 loan charge. It is quite possible they were not talking about tax at all.
It’s not a Manic Street Preachers-y type of subject matter.
On October 2017, I submitted evidence to the Finance Bill Committee regarding the so-called April 2019 loan charge.
I have also recently met with Stephen Lloyd MP regarding his Early Day Motion (“EDM”). In our conversation, Mr Lloyd said this was an issue of ‘natural justice’ and I agree with him.
On 15 May 2018 I wrote to Mel Stride MP, Financial Secretary to the Treasury, with the following:
‘My firm set out detailed submissions (“Our Original Submissions”) to the Finance Bill Committeelate last year. As such, we do not propose to repeat any of the detailed technical analysis or make any further general points.
However, we would like to ask for the Government’s response to a number of relevant questions legitimately raised by the provisions of Schedule 11 of the Finance (No.2) Act 2017 colloquially known as, and hereinafter referred to, the April 2019 loan charge.
- Does the Government believe that the introduction of the loan charge is retrospective?
- If not, will the Government please provide detailed reasoning as to why they believe the loan charge is not retrospective. (My view is set out in Para 55 of Our Original Submissions).
- Why has the Joint Committee on Human Rights (“JCHR”) not reviewed these rules? For example, the Pre-Owned Assets Charge, the most analogous tax provisions was discussed by JCHR in a high degree of detai (See Para 66 of Our Original Submissions). However, the JCHR has confirmed to us that it has not reviewed these provisions and it is not scheduled to do so.
The Protocol on unannounced tax changes
In March 2011, the Government first published a Protocol on the unscheduled announcement of changes to tax law.
This set out the criteria under which tax changes would be announced other than at the Budget.
Most pertinently, it stated that:
‘The Protocol will explicitly recognise that changes to tax legislation where the change is effective from a date earlier than the date of announcement will be wholly exceptional’.
- Do they believe the policy is consistent with the Government’s Protocol on unannounced tax changes?
- If so, does the Government believes that the reasons behind the April 2019 loan charge are ‘wholly exceptional’? (My view is expressed at Para 77 of Our Original Submissions)
Self-employed and close company extensions
It was clear from the legislation that the Part 7A of ITEPA 2003 (aka disguised remuneration) required a relationship between an employer and an employee.
From 6/4/17 the scope of the legislation was extended to include the trading income paid to third parties.
From 6/4/18 the scope of the legislation was extended to include close companies
However, it is our understanding that the loan charge is designed to similarly to those who entered into schemes caught by these extensions well before the disguised rules themselves were expanded. This seems wholly inequitable.
Why does the Government believe that it is fair to apply the loan charge to those caught only by new rules despite the fact the original legislation did not attempt to catch such a transaction?”
Little Baby Nothing
Surprisingly, I did get a response from Mr Stride or, more accurately, from HMRC’s policy unit. A copy of that letter is here.
Clearly the letter is a circular. However, it is disappointing that the bulk of the letter is taken up with a ‘throwaway’ description of DR schemes and the loan charge.
I might be being somewhat indulgent, but it would be nice if they created two standard letters. Firstly, for those who have a life and don’t really care about tax details. This would look rather like the one I received.
However, perhaps they could also draft one for tax professionals or enthusiast. It does not have to agree with my position but could at least speak in grown up terms. I did, at the end of the day, go to the effort of sending a 20-odd page pile of evidence to the Finance Bill Committee on the subject of the April 2019 loan charge last year. As such, I do have a bit of an understanding of what a DR scheme and the April 2019 loan charge is!
OK, yes, I am being indulgent.
In any event, there is no semblance of an attempt to set out any answers to the points raised in my letter.
Nothing about the Joint Committee on Human Rights. It would be usual for them to look at this. They have not and are not going to do. Why not?
There is nothing in the letter about the extension of the DR rules to close companies and self employed individuals. The original rules did not attempt to catch self-employed arrangements. Part 7A has been extended to capture these and certain close company arrangements. However, how is it right that these are also brought in to the 20 year swamp that is the loan charge? No comment.
One point in this circular letter where there is a clear and present danger of them answering my question is around the ‘retrospective’ nature of the charge. Clearly, HMRC do not agree that the charge is retrospective.
A definition of ‘retrospective’ legislation provided by the Chartered Institute of Taxation:
“When we refer to retrospective legislation, we mean legislation that is retrospective in the full sense of the term, in that the legislation imposes (or increases) a tax charge on income earned, gains realised or transactions concluded at a time before the legislation was announced’
The key is when the income or, perhaps, when the ‘benefit’ arose.
In respect of DR schemes, realistically, if there was a benefit in the general sense to these schemes, it was when the ‘disguised’ funds were provided to them. In other words, when the loan was provided.
The argument at the time would be that the principal of the loan was not earnings and only any interest unpaid on the loan (by reference to the official rate of interest). As such, the main bulk of the funds was received tax-free (albeit with an obligation to repay the Trustees, most commonly, on demand).
So, in order to attempt to sidestep the definition as being retrospective the loan charge uses smoke and mirrors.
First of all, it decides that the loans taken out from the scheme (and not repaid) are transmogrified in to income. Secondly, once its DNA is changed, we then also hop in to a time machine and pretend it arises on 5 April 2019.
So the Government has created a contrived and artificial anti-avoidance rule of which any scheme designer would be proud.
In any real world sense, this is a retrospective measure.
You stole the sun from my heart
We should have some sympathy for those who are affected by this artificial and contrived anti-avoidance rule.
Of course, those who have participated in perceived tax avoidance do not garner much sympathy. They haven’t played by the rules (correction – perhaps played by the rules a little too well!).
However, the Government and HMRC must shoulder blame here. There is nothing novel in this planning. Such planning has been going on in the open for decades.
HMRC says, rather boldly, in its letter to me that:
“the loans are provided on terms that mean they are unlikely to be repaid, so they are no different to normal income and are, and always have been taxable”
Of course, if this is true then both HMRC’s guidance and the Courts have been wrong over many years. Indeed, if they have always been taxable then why is the loan charge required at all?
Quite simply, if HMRC and the Courts struggle to come to grips with the legislation over many years then how does a teacher, nurse, IT contractor or anyone else?
Further, it is interesting that HMRC’s letter states that the loan ensures that scheme users ‘pay their fair share of tax’. Of course, it does no such thing.
If this was the intention it would essentially add the ‘income’ to the other income for each relevant year and the tax liability would be worked out accordingly. It would seem that, save for all but the wealthiest taxpayers, it is likely that this would erode the amount of tax due. This is because the loan charge dumps one big dollop of pretend income as arising at an arbitrary date and taxes it all in that year.
Nothing fair about that.
Slash ‘n’ Burn
Confusion still reigns in Government and Parliament however.
In a debate last week Mel Stride MP made some comments following a question from Perter Aldous MP on the April 2019 loan charge. He stated the following:
Peter Aldous (Waveney) (Con)
To follow on from the question asked by the hon. Member for Eastbourne (Stephen Lloyd), the retrospective nature of the 2019 loan charge could bankrupt thousands of people. Will the Government revise legislation to ensure that that does not happen, with the loan charge only applying to disguised remuneration loans made after the passing of the Finance (No. 2) Act 2017?
This is not retrospective legislation. The activities and arrangements entered into by those who are in scope of this measure were not legalwhen they were entered into, even though they may have been entered into in the past. The loan charge is there not to apply penalties for that behaviour, but to ensure that those individuals pay the right amount of tax.
Errr, so the EBTs and other schemes were not legal when they were entered in to?! What a peculiar, and plainly wrong, statement to make. In Parliament. Not even HMRC are arguing that these schemes were illegal.
Let us hope that Mr Stride is simply misinformed and he will take the necessary steps to correct this statement.
Anthem for a lost cause
‘But you said our Children will be next?’
It is the rather simplistic definition of retrospective legislation provided in their letter that is particularly concerning:
‘It does not change the tax position of any previous year, or the outcome of any open compliance checks. It is a new charge, arising at a future date, on DR loan balances outstanding at that date.
If the Government / HMRC believes that it is not retrospective and it is fair to introduce a tax charge as long as it does not alter previous tax years or upset any open enquiries then, to be honest, anyone could be in trouble in the future.
That loan from a family trust? Well, it used to be capital we know. But now it’s not. We are going to pretend that its income arising on 5 April 2020. Unless you pay the back the funds to the Trustees.
Mr Non-dom, you know those funds you remitted from your capital account whilst UK resident? Well, those are no longer capital. They are a new income source arising on 5 April 2020. You can of course pay the funds back to an overseas account.
Get the drift.
All the Government and HMRC have to do is gather up a prior benefit they do not agree with any more, transmogrify it in to a ‘new income source’ and then pick a future date to tax it.
This is why retrospective / retroactive legislation is an affront to the ‘rule of law’.
Perhaps this is something the Manics might sing about after all…
If you have any queries over the April 2019 loan charge then please do not hesitate to get in touch