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  • Loan Charge – Sliding Down the Slippery Slope?

    12 June 2020

    Andy Wood


    I am talking about retrospective tax law and its apparent creep in to many areas of UK tax law.

    Let’s be clear, retrospective tax legislation is not prohibited.

    However, the understanding is that it should be ‘exceptional’ and it should be restricted to cases of egregious behaviour. Otherwise it erodes the certainty on which a taxpayer seeks to rely when making an investment or business decision.

    However, this is no longer the case. Indeed, there are multiple examples in what is now bundled up as Finance Bill 2019-21.

    Loan charge

    Following the report of Sir Amyas Morse, amendments to the loan charge (which technically triggered in April 2019) are passing through the house as we speak.

    There was hope that this might mean this legislation would be made prospective and / or better settlement terms would be offered allowing once and for all the historic problems to be boxed off and a proper forward looking solution to curtail the evolved schemes could be found.

    However, the loan charge is like the black knight from Monty Python’s Holy Grail. Despite bits of it being hacked off, it stubbornly remains hopping around on its remaining limb swinging its broadsword.

    Sadly, the loan charge has condemned tens of thousands of people to life under a financial black cloud for many years. Whether one agrees with the use of such schemes or not, it is difficult not to have sympathy for those who have had the rug pulled from under their feet by these backwards facing provisions.

    We have discussed the loan charge ad nauseam on these pages. Through smoke and mirrors, the Government has asserted that the loan charge is not retrospective. Clearly, at least in spirit, it is.

    It is propped up by the sophistry of HMRC and Government ministers.

    Further, it is perverse that those who have taken loans from these schemes exist in a cruel, legal parallel universe where:

    • In HMRC’s eyes for income tax purposes, the loans are illusory and subject to tax in full as earnings;
    • In HMRC’s eyes for capital tax purposes, the loans are real loans and a write-off is subject to IHT;
    • For ‘third-party’ chancers who have ‘purchased’ loans from scheme trustees, these are real loans that they are attempting to enforce.

    As stated above, the loan charge actually engaged over 12 months ago. It was heavily pruned following Morse’s report. The hope is that, with unprecedented opposition in Parliament from MPs, it can finally be struck down.

    Sadly, I don’t hold my breath.

    Securing the Tax Base – Automatic Penalties

    In October last year, the Revenue decided to issue what, on the face of it, was a rather anodyne note entitled ‘Securing the tax base’.

    There was an explanation of how HMRC had employed various automated processes “for many years” to help with “the assessment and collection of taxes”.  However, it went on, these processes “ha[d] been challenged in the courts on the basis that it is not supported by legislation”.

    However, the truth is that HMRC’s automation of penalties had not only been “challenged” but entirely dismantled as a result of a series of rulings where it was found that only “a flesh and blood human being who was an officer of HMRC” could issue a penalty.

    This is perhaps a limitation that many taxpayers and tax advisors might have found quite surprising. Certainly, I have no objection to certain penalties being generated automatically.

    The problem is that the new legislation applies prospectively AND retrospectively.

    Furthermore, we are told that “this is not a new policy” and is merely “clarification”.

    This is bunkum.

    No, the Courts have determined that HMRC’s understanding of the law is incorrect. The law is that a computer cannot issue notices where an officer is required.

    This represents a ‘change’ and a retrospective one at that.

    See our detailed article on this issue from last year.

    “Reversing’ Inverclyde Property Renovation LLP (“Inverclyde”)

    This is a further example of retrospective changes in the deepest darkest procedural matters in the tax code.

    It concerned an appeal in to whether HMRC had opened and closed the enquiry using the correct provisions.

    The FTT agreed with the taxpayer and also agreed that the existing relevant authorities for this remained valid law. As such, the taxpayers’ appeal was allowed.

    But, lo and behold, the Budget included more legislative gerrymandering:

    “The Government will legislate prospectively and retrospectively in Finance Bill 2020 to put beyond doubt that LLPs should be treated as general partnerships under income tax rules. This will ensure HMRC can continue to amend LLP member’s tax returns where the LLP operates without a view to a profit. This measure does not create any new or additional obligations or liabilities for taxpayers…

    It clarifies the legislation to ensure the rules work as designed and intended.”

    That last line is simply not correct.

    The new provisions change the law as decided by the Court. Retrospectively so.

    Entrepreneurs’ Relief

    At the latest Budget, we also saw retrospective changes infecting the more mainstream areas of tax.

    As most people will be aware, the maximum amount of Entrepreneurs’ Relief (“ER”) has been shrunk from £10m to £1m with these headline changes being effective from Budget Day.

    However, the new measures introduced rules that also caught anyone who had attempted, prior to the effective date, to bank the relief.

    In other words, these changes would negate the planning that individuals, with the wherewithal to do so, had entered in to before the Budget and before the changes were announced.

    These are described as Anti-forestalling provisions.

    But, forgive me, it would be fair to describe them as anti-forestalling provisions if the changes to ER were announced as taking effect from 6 April 2020 and these types of measures, preventing a ‘friendly sale’ between Budget Day (when announced) and the later date on which they became effective.

    Instead, these ‘special provisions’ are textbook examples of retrospective legislation. They simply increase the tax burden on transactions entered in to before the changes were announced.

    Tax Abuse & Insolvency

    These new draft provisions set out the Government’s decision that, where Companies (and LLPs) display particular ‘abusive’ tax behaviours, then the corporate veil will effectively be lifted.

    This is achieved by making certain individuals jointly and severally liable for the relevant tax liabilities.

    There are three cases of ‘tax abuse’ and these were discussed in some detail in our previous analysis.

    It is clear that, in respect of cases 1 and 2, the new rules are purely prospective. Both the liabilities and the acts or omissions creating them must have taken place after the Finance Bill receives Royal Assent.

    However, Case 3 is different.

    HMRC have left a little ‘present’ in these provisions. It is only the penalty itself which must be issued after Royal Assent. The behaviour could have happened many years ago.

    One of the gripes of the Loan Charge has been that the users have been taxed retrospectively and the promoters have got off ‘scot-free’ sailing into the sun set on their yachts.

    So, for instance, a scheme promoter which was selling EBTS in 2014 and was liquidated in 2016, would seemingly be in these provisions if, say, a DOTAS penalty was issued after Royal Assent.

    Smallest violin in the world territory?

    Maybe so.

    However, it is an example of the further chipping away of certainty in the UK tax code.

    Further, it seems somewhat surprising that tax evaders in the first case, who may have deliberately not filed a return, are not also subject to similar retrospective action.


    It seems that we must face the new reality that tax retrospective tax legislation is no longer exceptional and is no longer reserved to the arena of the highly technical or aggressive tax planning.

    Certainly, it appears that HMRC are happy to push forward legislation that tests these boundaries of certainty.

    Dressed up as ‘retroactive’, a ‘clarification’ or ‘anti-forestalling’, this is a slippery slope.

    One of the feelings from the Loan Charge is that MPs felt ‘duped’ by HMRC and the treasury ministers driving this forward. This is perhaps why there are well over 200 members of the Loan Charge APPG.

    However, there is a clear danger with the above roster of retrospection that there is a danger of history repeating itself.

    These new rules should be properly scrutinised now.

    If you have any queries about this article, or tax matters in general, then please do get in touch.

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