Lords condemn HMRC over ‘devastating’ 2019 Loan Charge

The Lords have exposed a catalogue of failures by HMRC – and potentially worse -- in a scathing report on the 2019 Loan Charge.

In the first official probe into the Revenue’s handling of the charge, peers accuse the taxman of multiple failings, including unresponsiveness, disproportionate conduct and insufficient actions.

But suggesting that something far more sinister has been at play, they also reveal HMRC’s threatening behaviour, and its prioritising of “the recovery of tax revenue over justice”.

The Lords also trounce claims made by HMRC’s CEO John Thompson, chancellor Philip Hammond and two Treasury ministers that the 2019 Loan Charge is not retrospective, by outlining how it is retrospective.

One of those ministers, Mel Stride MP, who repeatedly refused to attend the Lords’ evidence sessions, comes in for particular criticism, given that he is the minster responsible for the charge.

'Serious concerns'

His refusal to appear gives rise to “serious concerns” and “did not make us feel that the fair treatment of taxpayers was being considered properly by the government,” the peers say, in a rare singling out of an MP and minister.

Tax dispute advisory WTT Consulting said: “If the minister is prepared to disrespect their Lordships in such a manner, then his officials’ approach to taxpayers – shown in this report to be well short of the standard expected and written into their own charter – is vindicated.”

Qdos Contractor, another tax specialist for contractors said: “Mel Stride refusing to give evidence in the inquiry speaks volumes of HMRC’s unwillingness to listen to these concerns.” 

Mr Stride’s colleague, John Glen MP, used a recent appearance in the House of Commons to reject criticisms that HMRC is not pursuing promoters of disguised remuneration schemes (which the charge is tied to until as far back as 1999).

'Tax revenue over justice'

But in their 60-odd page report on HMRC powers, the Lords' economic affairs committee indicates that the criticism -- voiced recently by contractor trade body IPSE -- is warranted. 

“We have seen little evidence of action taken against those who promote disguised remuneration schemes," the committee said.

“In the absence of publicised actions, HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters”.

WTT’s director of tax Graham Webber reflected: “If the policy on taxation is for all to be treated fairly, why are all those involved in the use of disguised remuneration schemes (end clients, intermediaries, promoters) not subject to [HMRC] demands [too]?”

'Devastating'

Moving to address the issue of fairness -- the committee’s enquiry is entitled ‘The Powers of HMRC: Treating Taxpayers Fairly,’ the Revenue’s Ruth Stanier made some bold claims.

In her evidence, and contrary to the evidence submitted by “many” affected contractors, she told the Lords that HMRC “deal[s] with cases appropriately and sympathetically”.

The committee countered: “The consequential impact of the loan charge and HMRC’s handling of it for taxpayers…has been devastating.

“Suicidal feelings were reported. One witness called their situation ‘a living hell.’”

The Lords therefore endorse the call made to HMRC (but which it rejected) for a dedicated phoneline to assist those severely distressed due to the loan charge.

Interestingly, such individuals are “very different from those generally perceived to be involved in tax avoidance,” and in notable instances, were “denied the opportunity to enter into a normal employment contract.”

'Threatening'

The committee added that its call for a phoneline is all the more pressing not only because they want it up and running “well in advance” of April 2019, but also because HMRC is likely to be making distressed individuals feel worse -- even intimidated.

“We were disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy”, the committee said, in a summary of its findings.

“Whether these threats were explicit or perceived, they have caused considerable anguish for a number of individuals.”

Qdos Contractor’s Seb Maley said: “It’s clear HMRC’s attitude towards taxpayers needs to change.

“Approaching cases from a guilty until proven innocent is unjust and has had a hugely damaging effect on taxpayers, irrespective of whether they are contractors or not.”

'Deprived taxpayers of certainty'

Between that guilt or innocence is where many taxpayers have been forced to linger, the Lords found. In fact, HMRC did “not do enough to counter [the] misinformation” from scheme providers.

Worse still, and implying actions that amount to more than just incompetence, the Revenue also 'deprived taxpayers of certainty even in situations where they were actively seeking to engage with HMRC to finalise matters.'

It is this damning finding buried in paragraph 81 of the Lords’ full report, combined with HMRC’s reliance on its “little-read” Spotlight publication to make its views known, that feeds into the committee's headline recommendation.

“We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been ‘closed,’” the peers say.

While this falls short of what many 2019 Loan Charge contractors and their supporters wanted (a full removal of the retrospective element of the charge), it represents a victory of sorts, particularly when viewed alongside the Lords’ five other recommendations relating to the charge.

“[We are] impressed and heartened that the weight of evidence we and others in the profession were able to deliver to the inquiry…has been recognised by their Lordships,” said WTT.

“The committee has foreseen and reported with clarity and precision the roots of the present problem, the effect it will have and the solutions… [so we] endorse all of the recommendations and will continue to press for those identified in the report as responsible for implementing them, to actually do that.”

'Disastrous'

Qdos' Mr Maley agrees. “It’s vital these recommendations are taken seriously and appropriate changes made to the way HMRC enforces tax compliance.”

He also said: “In the past, HMRC’s aggressive pursuit of contractors has had disastrous consequences. We wholeheartedly agree with the view that this needs to stop.”  

Despite the overwhelming criticism against it, the Revenue is likely to point out that the Lords do say that 2019 Loan Charge contractors “must accept some responsibility.”

“Disguised remuneration schemes are an example of unacceptable tax avoidance that HMRC is right to pursue,” the committee acknowledged.

“All individuals using these schemes must accept some degree of culpability for placing an unfair burden on other taxpayers.”

'HMRC's 13-year communication failure'

But the Lords seem more weighted towards HMRC accepting its many failures, including its “failure to pursue taxpayers proportionately to their circumstances,” and its failure to “communicate effectively with some users” on a timely basis, from 2004, and to legislation in 2011, right up to the judicial process in 2017.

The tax department’s approach to the loan charge also “diverges substantially from the principles in the Powers Review,” in administering a charge that ‘undermines the time limits for tax matters of four, six and 20 years which give certainty to taxpayers about their affairs.’

So indicating that the government, and not just HMRC as its administrator, needs to accept is failures too, the committee says:

“The loan charge legislation was introduced by the government and passed by parliament. HMRC is obliged to implement that legislation, and should therefore not be held wholly responsible for its basic principles.”

WTT’s Mr Webber said in a statement: “In trying to deliver increasing amounts of money to a voracious government, short cuts have been taken by HM Treasury and HMRC in making tax policy, often not observing their own procedures.

“Those policies are delivered with maximum force and minimum notice. Notions of degrees of blame have been ignored and every taxpayer who is accused (not proven) to have been involved in tax avoidance feels the full force of these by being treated as little more than dishonest.”

'New phase'

He added that the Lords report should mark “the beginning of a new phase,” whereby HMRC and HMT would now abandon their “dogmatic approach to taxing contractors, historically and currently.”

The tax office should make use of the powers they have rather than claim new, unnecessary levers, believes Mr Webber, himself a former tax official, who reiterated:

“HMRC and HMT…now have the best opportunity they will ever have to resile from the path now exposed and criticised by the Lords and return to where they should be.”

'Damning'

But there is no suggestion, so far, that the Revenue is ready to change tack.

A spokesman for HMRC said last night: “We’ve taken unprecedented action to crack down on avoidance and evasion, making sure people pay their fair share of tax and securing funding for our vital public services.

“Parliament has given HMRC powers it needs to tackle businesses and individuals who do not pay their fair share, and it uses them responsibility and subject to appropriate checks and balances.”

Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed, sounds unconvinced about the latter claim.

“A central criticism [in] the House of Lords’ report is that HMRC has been too aggressive in its pursuit of those who used the schemes," he said.

"[Indeed] the report calls for HMRC to re-focus its compliance efforts on those who had promoted and profited from their use...[and describes] HMRC’s approach as ‘aggressive’, ‘unfair’, ‘devastating’ and a ‘tax on justice’. [This report] is a damning indictment of a retrospective taxation which has left many with substantial repayment demands."