Hammond admits he was wrong about Loan Charge contractors

A red-faced Philip Hammond has been forced to admit that he got it wrong when he described the use of disguised remuneration schemes as “tax evasion.”

The chancellor fesses up in a letter published on the Treasury Committee website, conceding that he “should have said" tax "avoidance" -- not evasion, when answering MPs' questions about Loan Charge 2019.

Steve Baker MP says that Mr Hammond’s correction represents “an important concession,” and is now calling afresh for the Treasury to remove the retrospective element of the charge.

Made in a letter to Nicky Morgan MP, the chancellor's correction also represents a victory for the many parties who condemned Mr Hammond for wrongly implying Loan Charge contractors acted illegally.

'Clarify'

Those parties include the Loan Charge Action Group, and business advisory Quantuma which used an article on ContractorUK to urge Mr Hammond to reconsider his stance.

“I would like to clarify my comments to the committee in reference to the use of disguised remuneration (DR) schemes which I described as ‘tax evasion’,” Mr Hammond writes in his letter to Ms Morgan, the committee’s chair. “I should have said ‘tax avoidance’.”

This is a “very important distinction” according to Mr Baker who, in welcoming the chancellor’s correction, pointed out that evasion is illegal, whereas avoidance is not.

But tax dispute firm WTT Consulting questions whether Mr Hammond is genuinely sorry because his correction, buried in a letter primarily dealing with fixed-odds betting, omits any sort of apology.

'Confused'

“We can hope (but not expect) [the chancellor to] tell….Mel Stride [MP, the Financial Secretary to the Treasury] the difference between the two, as he still seems very confused,” the firm said online.  

Despite welcoming the distinction between evasion and avoidance, Mr Baker said last week that avoidance constituted an “undesirable and unintended use of Parliament’s legislation.”

The Tory MP also said he wanted to “stridently condemn the promoters of these schemes, who have ended up luring people into misery through what they have done.”

'Not right'

Last week, Treasury minister John Glen said that five cases against scheme promoters were currently before the courts, with ‘each one covering a large number of individuals.’  

“It is not right to say that HMRC is not engaged with those who promoted the scheme,” the minister said, potentially in reply to claims made by contractor trade body IPSE.

“I am happy to concede that for the 50,000 individuals affected, there are obviously responsibilities for those who promoted this.”

Mr Glen, a former management consultant who is now the Treasury's economic secretary, furnished MPs with other figures; notably “contacts” with HMRC about the loan charge climbing to 24,000, and phone calls by those affected to HMRC increasing from 2,000 to 4,000 a week.

'Automatically'

The minister also said that Time To Pay arrangements lasting five years would now “automatically” be put in place for individuals whose annual income is under £50,000.

This compares to the £60,000 average salary of scheme users (most of whom worked in professional services according to HMT), indicating such an automatic TTP may be of more interest to the 3% of those affected who worked in health and education (also according to HMT).  

Other public sector contractors -- if they wish to settle -- may also want to explore payment plans, even if they are among the contractors who were used and paid by HMRC during the assessable period.

'Not retrospective'

That period covers tax years that pre-date the announcement, introduction and enforcement of the incoming 2019 loan charge but in responding to MPs, the Treasury’s Mr Glen ventured that “the legislation is not retrospective.”

To the din of MPs laughing loudly at his claim, the minister continued: “Payments subject to the loan charge should always have been, and will be, subject to tax.

“The announcement in the 2016 spring Budget by the former Member for Tatton provided scheme users with a three-year period in which to repay disguised remuneration loans or agree a settlement with HMRC to avoid the charge.”  

He added: “Although the Financial Secretary [Mel Stride] and I have tremendous sympathy for those facing large tax bills, it is unfair to let people get away with not paying the tax they owe.”

'Injustice'

Mr Hammond, who replaced that former MP for Tatton as chancellor of the exchequer, writes in his Treasury Committee letter: “It is not normal, or indeed reasonable, to be paid in loans that are not repaid in practice.

“It is not fair to the vast majority of taxpayers who pay their taxes in full and on time for anyone to benefit from contrived avoidance of this sort and that is why this government has legislated the charge on DR loans.”

Meanwhile Mr Baker, who has tweeted the chancellor’s comments including his ‘what I should have said’ admission, told the House of Commons: “I really hope that the Treasury goes away, looks at the measure again and eliminates retrospection.

“When people have acted in good faith under advice and end up subject to injustice, we must uphold the principle of the rule of law.”