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Bob Neill MP: The Loan Charge should be scrapped - HMRC has failed every test of fairness

4 min read

Bob Neill MP writes on the concept of ‘fairness’ in relation to HMRC attempting to retrospectively claim income tax from contractors paid via non-taxable loans.

The concept of “fairness” resonates strongly for most people. Behaving fairly, receiving fair treatment and getting a fair hearing are ideas that any decent person automatically signs up to.

The overwhelming majority of us sign up to the concept of 'paying your fair share'. We expect that in our personal lives - and we expect it in the way in which we pay for the public services we all use. 

That concept of fairness applies to the tax system that raises the funds for services. And it applies particularly in two important ways. First, we expect that everyone should pay their fair share of tax, considering their circumstances. But secondly, we expect the system itself - and those who run it on behalf of the State - to treat individual taxpayers fairly as well.

That is what is at the root of the controversy over the operation of the Loan Charge.

‘Loan Charge’ is the term used to describe the steps currently being taken by the Government and HM Revenue and Customs to recoup money which they claim should have been paid as tax on earnings, but which, through various schemes promoted to taxpayers by financial advisors over a number of years, had instead been paid as non-taxable loans to those individuals. The assertion is that these were in truth never going to be repaid, so should have been treated as income and therefore taxable. HMRC are now pursuing the taxpayers for what they claim is that tax.

The schemes were widely used, particularly by people employed as contractors, not just the traditional ‘trades’ but also in areas such as financial services and IT. Around 50,000 people are thought to be involved. 

Deliberate tax evasion offends against that principle of ‘paying your fair share’ and is rightly condemned, and illegal. There is no doubt that the Treasury lost revenue as a result of these schemes. However, further examination suggests that the situation with the Loan Charge is not that straightforward. 

Firstly, it is clear that HMRC knew about these schemes for years and did nothing about them at the time.

I have seen that from copious documentation brought to me by constituents - 160 families are thought to be affected in Bromley and Chislehurst alone. They submitted their tax returns every year and in most cases HMRC signed them off without raising any concerns.

Secondly, it is also clear that very many of these people had acted in good faith, based on advice from respectable professional advisers. They were sometimes supported by legal advice from QCs.

In other cases, people were actively encouraged to use one of these schemes by their employer, or were sometimes even paid through such arrangements without their knowledge. In fact, this was a practice used by some government agencies - including some of those acting on behalf of HMRC themselves.

Until enforcement letters dropped through their letter boxes, sometimes years later, seeking sums in many cases well in excess of £100,000, they had no idea that they had done anything wrong.

Thirdly, despite protestations to the contrary, the evidence shows that whilst HMRC have been draconian in jumping on individual taxpayers, they have done little to pursue the promoters of these schemes, who many might well regard as being most at fault, and where, I would argue, HMRC should be focusing their efforts. Indeed, many of these businesses are still operating, sometimes having changed their trading names. I do not think that most people would see that as ‘fair’.

Leaving aside arguments as to whether the Charge is retrospective or retroactive, the lack of action by HMRC at the time sits ill with the aggression of their pursuit of individuals now. This is particularly striking when you consider how keen HMRC are to rely upon statutory time limits and deadlines for making claims when taxpayers are seeking legitimate repayments from them! 

I have seen first-hand examples of how this approach is pushing people into real financial hardship and even bankruptcy, impacting on people’s health and tearing families apart under the strain.

Other MPs who are fellow members of the excellent Loan Charge APPG have found the same. HMRC have failed that test of 'fairness' in the way in which they have dealt with these people. That is why scores of MPs and Lords, from across the political spectrum, have called for the operation of the Loan Charge to be immediately suspended for a full and, crucially, independent, inquiry to take place. Once unfairness is confirmed, the Charge should be scrapped. 

Bob Neill is Conservative MP for Bromley and Chislehurst and Chair of the Select Committee on Justice.

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