Government to radically change loan charge after review finds it caused 'serious distress'
Ministers will overhaul a controversial tax policy after an independent report found it caused “serious distress”.
A report into the so-called 'loan charge' - led by former public spending watchdog Sir Amyas Morse - condemned the Government for not getting the “balance right between tackling tax avoidance and protecting the rights of taxpayers".
Taking effect earlier this year, the charge has been linked to seven suicides and has left as many as 50,000 people facing significant tax bills.
It was levied against contractors and freelancers who used so-called disguised remuneration schemes, which allowed employers to avoid paying tax.
Under such schemes, those who used the arrangment were paid their salary as a loan which was never intended to be paid back, as the income from loans was not taxable.
But the Treasury did not classify the schemes as tax avoidance until 2010, and many contractors were advised to use the schemes, or told they had to use them to keep their jobs.
As part of plans to crack down on tax avoidance, the Government had planned to retrospectively tax all who had used the scheme, and apply a punitive loan charge on top.
But, these plans drew widespread criticism from MPs and professional bodies after many workers were left with significant tax bills.
Publishing his report, Sir Amyas said: "The foundation of our tax system is fairness and where this is undermined through avoidance schemes it is right that these are tackled.
“However, in doing so, the government and HMRC must act proportionately and responsibly.
“As my review makes clear, the design and delivery of the loan charge didn’t get the balance right between tackling tax avoidance and protecting the rights of taxpayers and, in some cases, has caused serious distress to the individuals affected.”
"I’m pleased to see the Government commit to act on the recommendations of my review, bringing the loan charge back into line with the wider tax system, better protecting those who are least able to repay and providing certainty for all those affected."
In response, the Treasury has announced that it will drastically reduce the scope of the charge, applying it to loans taken out since 2010, rather than the original date of 1999.
Those who declared their loan on tax returns since 2010 and were not contacted by HMRC will also be exempt from the charge.
The deadline for paying the charge will also be moved from January to September next year, allowing payments to be spread more easily.
It is estimated that these measures could reduce the tax bill for more than 30,000 people, while a further 11,000 will now be totally exempt.
Financial Secretary to the Treasury Jesse Norman said the Government “welcomed the findings of the report".
He added: “There have been important public concerns about this policy, and that is why we commissioned this report and have responded so quickly to it.
“The changes we are making go to the heart of Sir Amyas’s concerns about the fairness and application of the Loan Charge, which he accepts in principle."