The LITRG’s welcome call won’t change loan charge legislation, at least not immediately

Throughout a new Autumn Budget 2021 submission paper, the Low Incomes Tax Reform Group astutely raises concerns which highlight the restricted nature of HMRC’s implementation of Sir Amyas Morse’s recommendations, and just that alone is reason enough to welcome the paper, writes Graham Webber, director of tax at WTT Consulting.

From a contractor perspective, these concerns are very much a reality, and are limiting the practical effect of the independent review that was carried out in December 2019 to mitigate the effects of the charge on taxpayers.

The erosion of taxpayer protections

The LITRG’s recommendation to pause all activity around the loan charge, in order to carry out an extensive review, is a sensible way to ensure the return of taxpayer protections, rather than them being eroded by a complex piece of legislation, implemented without due care.

The loan charge remains a controversial piece of legislation and is subject to active legal action. The actions (to date) are focused on whether the charge is compatible with UK and EU legislation, or whether HMRC has breached its authority in making decisions in this area.

No change, at least not until...

We will have to wait and see the outcomes but, in our view, any action taken by HMRC now would possibly compromise the ongoing cases. It would be unusual for one party in a legal dispute to make amendments to legislation before the hearings were decided. So while changes of the type LITRG are indicating are needed would indeed be positive, we are not anticipating any from HMRC’s approach, not until those legal actions are concluded.

Consequently we are expecting to have to deal with HMRC enquiries based on the law as it stands now. We think that there is scope for a defence to the present crop of enquiries (and the pace of these from HMRC is picking up), especially in light of HMRC’s interpretation of the ‘Rangers’ judgment being so recently slighted in tribunal. We do not expect HMRC to roll over and capitulate, however, given the sort of numbers they constantly – but without verification -- claim are at stake.

HMRC's current approach, and ours

More verifiably, our clients have met their legal obligations around ‘disclosure.’ We are seeing HMRC beginning their enquiry processes now, although it is rather sporadic and somewhat disorganised.

It would appear that the internal shifting of responsibilities in HMRC (which saw departmental work moved out of counter avoidance and into other units), has not been as smooth as it should have been. The result is that HMRC officers looking at cases now either do not have previous responses made or are not reviewing them.

Undeterred, our approach is to bring all such loan charge enquiries to as swift a conclusion as we can, and that is almost certain to require litigation in the tax tribunals. Learning from the past, our advisers will be taking the initiative and be pressing for early referrals so that defences already prepared can be deployed.

Final thought

As I have tried to outline here, while it is to be hoped that one of the legal actions referred to can make some changes to the loan charge in terms of legislation, or application, we repeat -- we are preparing for there to be no legislative changes, including in this month’s Budget on October 27th, unless in the unlikely event that a court orders it.