In December 2019, the Government bowed to significant pressure and, on 20 January 2020, published draft legislation to implement changes to the Loan Charge. Before looking at these changes, it is worth summarising (with apologies for the over-simplification) the background to the Loan Charge.
- For many years, arrangements were marketed under which, instead of clients paying remuneration directly, a trust (funded by the client) would make a loan to an employee or contractor.
- The loan would be left outstanding with the understanding that the loan would be written off if the employee or contractor died or became non-UK resident – at which point it should not be subject to UK tax.
- HMRC considered that these schemes were not effective and the loans should be treated as income. However, HMRC was not supported in the courts, and lost in the case of Dextra Accessories Ltd & Ors v Inspector of Taxes  STC (SCD) 413 – which gave taxpayers, and promoters of loan charge schemes confidence that the arrangements were effective.
- In 2010, the Government made it clear that it objected to the arrangements and in 2011 introduced the disguised remuneration rules (contained in Part 7A ITEPA) to tackle employment income provided through third parties.
- In 2017 the Supreme Court found in favour of HMRC in RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland  UKSC 45, which overturned Dextra.
- In 2017, the Government introduced legislation that imposed a tax charge (the Loan Charge) on the balance of relevant loans made between 1999 and 2019 that remained outstanding on 5 April 2019.
The effect of the Loan Charge was that employees and contractors with outstanding loans either had to pay them back (out of taxed income), have the loan released (which would be taxable as income) or pay the Loan Charge. Whichever option was taken, HMRC was receiving tax on loans made up to 20 years previously.
The backlash against the Loan Charge was enormous with reports of taxpayers potentially facing financial ruin or even being driven to suicide by the pressure from HMRC to pay tax bills well beyond their means.
As with any argument, there are two sides. Almost every HMRC or HM Treasury announcement on tax, makes reference to taxpayers paying their “fair share”. One view is that the Loan Charge simply addressed the unfairness that some employees or contractors had been paid without paying their fair share of tax. No-one paid under the loan arrangements should have thought that they were entitled to be paid without paying tax on their earnings and they deserve whatever HMRC threw at them.
However, an alternative view is that taxpayers who thought they had settled their tax affairs many years ago were being faced with a backdated tax charge. The taxpayers had acted completely legally, HMRC knew what taxpayers were doing and let them continue. It was not fair for HMRC to make up for HMRC’s own failure to act promptly by changing the rules – effectively retrospectively.
Following an independent review, by Sir Amyas Morse, the Government has amended the Loan Charge in two main ways:
- the Loan Charge will apply only to outstanding loans made on, or after, 9 December 2010; and
- the Loan Charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, opening an enquiry)
Therefore, the Loan Charge will not apply to loans made before the point at which the law became (in Sir Amyas’ view) clear or to loans made prior to the introduction of the Loan Charge (in the latter case, provided that they were disclosed to HMRC). Many will still be badly hit by the Loan Charge. However, the changes will relieve large numbers of taxpayers who were particularly aggrieved by being treated as if they had broken the law before they knew what the law was. There is also a sharp message to HMRC that, where taxpayers have been open in their position HMRC should either challenge taxpayers during the normal enquiry window or allow taxpayers the certainty that their tax affairs are in order.
In addition, the Government has addressed two further areas of potential unfairness:
- HMRC will refund voluntary payments (known as ‘voluntary restitution’) already made (in order to prevent the Loan Charge) where the Loan Charge would not arise under the new rules – so taxpayers who settled their tax affairs early will not be penalised; and
- where the Loan Charge remains payable, taxpayers will be entitled to spread the tax charge across 3 tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021 – mitigating an additional unfairness in the Loan Charge that, by taxing loans from several years in a single tax year, potentially subjected taxpayers to the highest rates of tax.
So where does this leave the balance between the balance of fairness between the taxpayer and HMRC?
Tax avoidance is not a new phenomenon – walk around many cities and you can see buildings where the windows have been bricked up in order to avoid window tax (which ran from 1696 to 1851). However, the climate has changed and tax avoidance is becoming socially unacceptable – taxpayers should pay their “fair share” of tax (though what is “fair” is a matter of debate for another day).
To date, this has very much been a one-way street with measures being taken to tackle taxpayers seen to be paying less tax than they “ought to pay” but with little regard to HMRC being required to act fairly in dealing with taxpayers. In the relationship between the taxpayer and HMRC, HMRC will always have the power – they write the rules. However, possibly the changes to the Loan Charge represent a slight adjustment to the relationship and an acknowledgement that the tax system should be fair in both directions.
Leigh Sayliss is Head of Business and Property Taxes group at Howard Kennedy LLP.