Inequity of loan charge

My company website for Tax Training Ltd routinely reports avoidance schemes that fail. to

Normally I have little sympathy for those who are caught. Usually they dishonestly sought to avoid tax and were found out.

But I do have sympathy for many victims of loan schemes who have been hit by the loan charge from April 2019.

The government has an ambivalent attitude to tax avoidance. It regards this as immoral when done by commercial promoters, yet the government itself is the biggest promoter of avoidance schemes. The government lecturing accountants on the evils of tax avoidance is like King Herod lecturing us on the need for child protection.

Until 2004, there was (at least in theory), a clear distinction between tax evasion and tax avoidance. The former is illegal. It includes deliberately falsifying tax returns or concealing tax liabilities.

The latter is legal though not necessarily within the spirit of the law. This matter was poetically expressed by Lord Clyde of the Court of Session in Ayrshire Pullman Motor Services v Ritchie [1929] 14 TC 754: “no man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business, or his property, as to enable the Inland Revenue to put the largest possible shovel into his stores”.

He continued “The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’ pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, as far as he honestly can, the depletion of his means by the Revenue”.

In other words, if you come within the letter of the law, you can ignore the spirit of the law.

The exceptions are VAT and Customs Duties which are EU taxes rather than UK ones. The EU takes a teleological attitude of looking at the substance rather than the form. (Ironically, “substance over form” is a fundamental concept in British accounting, but not tax.)

In 2004, this changed when, almost unnoticed, the Paymaster General, Dawn Primarolo MP, introduced the concept of “artificial avoidance”. This is where something is blatantly contrived against the clear spirit of the law.

This means we have started to move towards the purpose-based approach for UK taxes. We have seen it in legal decisions such as Furniss v Dawson and in the creation of the GAAR Panel.

The ingenuity of legislators to find new ways of taxing its citizens is exceeded only by the ingenuity of accountants and lawyers to find ways round them. About 70% of all new tax law is to fix problems with old tax law.

HMRC routinely says that tax planning remains perfectly legal. It also says that there are not two or three clear categories of evasion/avoidance but a spectrum from blatant evasion to innocent planning. The issue is deciding on which colour to draw a dividing line.

If this is not problematic enough, we come to the government’s own tax avoidance schemes. George Osborne was very keen on these schemes. Philip Hammond has been much more restrained.

Tax law is surprisingly full of tax options. You can choose this or you can choose that. There is even national insurance class 3 which you can choose not pay at all.

Most tax accountants thought there were perhaps 200 or so of these options. In 2012, the Office of Tax Simplification counted them and found 1,156.

A landlord can choose whether to charge VAT on commercial rent. Individuals can choose to invest in an ISA. Companies can offer directors and staff six types of tax-advantaged investment scheme. There are extremely generous investment schemes for investing in new companies. There are national insurance breaks for taking on apprentices and young workers. And so it goes on. And on. About 25% of new tax law is about these schemes.

The government promotes its schemes by saying, “do what we want, and you can save tax”.

This brings us to the loan scheme. Although there are hundreds of complex tax avoidance schemes, there is always one step where the avoidance happens, and there are just a handful of choices.

One of these is the artificial loan. It is very simple. If I pay you £100 in wages, you are liable for tax and, possibly, national insurance. If I lend you £100, you pay no tax or national insurance. At some point, you repay me the £100.

The loan scheme exploits this arrangement. Instead of paying you a wage, salary or fee, I pay it to someone else, such as an offshore trust. I have not paid you, so you pay no tax (but see below). The trust then “lends” you the money. As it is a loan, you still pay no tax. The thing is that somehow you never get round to repaying the trust and they seem never to get round to asking you for it. Instead, the trust creams off a fee, typically around 18%, which is much cheaper than paying 40% or 45% income tax.

This is the scheme famously used by comedian Jimmy Carr and hundreds of others.

The problem is that the scheme does not work. It fails at the point that the money is paid to the trust. Under the disguised remuneration regulations, the fact that the money is paid to someone on your behalf is sufficient for you to be liable to pay tax.

As a tax avoidance scheme, it must be disclosed to HMRC which gives it a scheme reference number (SRN). That legally must be put on the person’s tax return.

This scheme was widely used for footballers and celebrities. These are people who earn large amounts but are not trained in business.

Consider it from their position. They are not accountants or lawyers. Someone says to them there is this scheme where you can save a lot of tax. They can point to others who have used the scheme and apparently saved tax (as it can take ten years to bring these cases to the tribunal).

They can say, the scheme has been approved by the tax authorities. Look, you can see HMRC has given it a reference number. (HMRC never approves a tax avoidance scheme.)

They can say it is legally sound and can show you a letter from a QC saying so. There are believed to be about eight QCs who for a fee will confirm that pigs can fly.

So it is reasonable to assume that this legitimate tax planning. Perhaps it uses one of the 1,156 government schemes. Why should a pop singer or footballer suspect anything?

The government clamped down by offering scheme participants a chance to settle their tax by 5 April 2019. If not, the whole balance of the outstanding “loan” is immediately chargeable to tax. So the innocent has paid 18% fee and is now hit with all the tax anyway.

About 6,000 of the estimated 50,000 people affected paid by 5 April 2019. The average loan involved is about £20,000 per participant.

Recognising that the taxpayers are often innocents, HMRC has agreed terms to allow repayment over time. Anyone earning less than £30,000 can repay over seven years; between £30,001 and £50,000 can have five years. Longer periods can be negotiated as they are for those earnings over £50,000.

This repayment periods are conditional that the taxpayer is not using another avoidance scheme. And they have tried. One scheme attempted to reclassify the loans as “fiduciary capacity” payments. In other words, the payee is holding the money for someone else, acting like a trustee. HMRC says this does not work, setting out its reasons in Spotlight 39 of 10 August 2017.

The BBC has agreed to provide loans to staff caught by the scheme. Such loans are not themselves within the tax charge, provided they are repaid.

The president of the Chartered Institute of Taxation, Ray McCann, has criticised the loan charge as retrospective legislation as no tax was due when the loan was paid.

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