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2019 Loan Charge and Parliament: Retro-spectacle
The question of whether something might be fair or not is usually highly subjective.
There is, of course, an old cliché suggesting that anything’s permissible in romance and military conflict but we all know that’s not strictly true.
In those situations as with many other aspects of life, love, labour and conflict, there are still rules which need to be abided by.
However, when the arguments underpinning those rules begin to shift, the perception of fairness becomes an even more fluid concept.
For example, take one tax measure, the 2019 loan charge, which is due into come into effect in April next year.
It’s a charge which was introduced as part of the 2017 Finance Act and applies to individuals who have previously taken loans from arrangements such as Employee Benefit Trusts.
Such loans were never HMRC’s particular cup of tea but, in the not so recent past, the Revenue wasn’t used to having its own way in the courts.
Despite its best efforts in successive Court hearings, HMRC’s arguments that these loans were subject to PAYE failed.
That’s not to say that these schemes were ever regarded as mainstream.
Nevertheless, there were many thousands of individuals – from IT contractors and public sector employees through to Premier League footballers – who did take advantage of the many different varieties of these arrangements which were available.
I should perhaps at this point flag up an important distinction. Whilst the taxpayer had enjoyed judicial success in respect of the loans, HMRC had certainly won the battle on the corporation tax deductibility of employer contributions (which had been the initial focus of HMRC) to this type of scheme through a combination of rulings and new legislation.
The position of this type of loan changed in 2010. Legislation was introduced in December of that year which broadly meant that any new loans from these schemes would become taxable. Importantly, though, the shift did not affect old, existing loans.
It should have spelled the end of any new schemes but it didn’t.
What happened was that scheme providers sought to achieve the same result in a slightly different manner in order to exploit perceived weaknesses in the new law.
That response provoked a reaction from the Government; namely, one of “enough being enough”. This context is, I reckon, where the 2019 loan charge comes from.
While that more draconian move was being considered, we also had a ruling from the Supreme Court last July in the matter now to be forever known as ‘the Rangers case’, which stated that placing funds into these schemes amounted to a ‘redirection of earnings’ for which tax should have been paid upfront.
So, what is the loan charge? As I’ve explained in detail elsewhere on this ‘blog, the new charge requires those who have outstanding loan balances either to repay them or face a PAYE charge on the outstanding sums.
That is, of course, bad news. However, it doesn’t only take into account new loans, including those taken out since the December 2010 law change effectively drew a line in the sand on the matter.
The 2019 loan charge is arguably far more pernicious. It targets all loans taken out since 1999 and not repaid.
I believe that the retrospective nature of the new rules is unfair. In fact, before the Finance Act 2017 became law, I registered my concerns with the parliamentary body considering its impact.
Although some take a different view and reckon that the charge is not retrospective, I disagree. A tax provision which attacks historic transactions and taxes historic benefits is, for me, absolutely retrospective.
In my submission, I pointed out that the Government’s own tax protocols dictate that retrospective action is only allowed in “wholly [my emphasis] exceptional circumstances”. At the time of writing, no-one has fully explained why the Treasury believes its clampdown on ‘disguised remuneration’ schemes should be treated as “wholly exceptional”.
It’s a theme which has now also been taken up by one MP – Stephen Lloyd, the Liberal Democrat member for Eastbourne – who has tabled an Early Day Motion asking the House of Commons to agree that “retrospectively taxing something that was technically allowed at the time, is unfair”.
Mr Lloyd has told the Daily Telegraph that HMRC’s pursuit of those who benefitted from these schemes is “immoral”.
Furthermore, he wants those who entered into schemes before the loan charge was introduced to be made exempt from the prospect of hefty tax bills. The problem with this idea is that this would render the loan charge impotent and it would fail in its main purpose to raise additional revenue from taxpayers.
In the same Telegraph article, I made clear my belief that there should be a full discussion of the background to the loan charge and, in particular, its retrospective aspect.
The Commons’ motion has already attracted some support from MPs of all parties (however, it has hardly been overwhelming as things currently stand) and the understandable interest of those people who are in HMRC’s firing line.
It remains to be seen whether the Treasury is willing to risk the spectacle of further bruising parliamentary exchanges over the shift in focus of its anti-avoidance campaign. However, I will not be holding my breath.
As some of the cases which have come to our attention underline, the personal and financial consequences of there not being any change are too terrible for some of individuals affected to contemplate.