Loan charge under review: Government’s tax policy set to be challenged under EU law

The government’s controversial loan charge policy could be subject to a judicial review for breaching European Union (EU) law, now that 85% of the £180,000 needed to fund a fresh legal challenge against it has been raised.

The policy, introduced in November 2017, is geared towards recouping the taxes HM Revenue & Customs (HMRC) claims individuals avoided paying between 9 December 2010 and 5 April 2019 by taking part in loan-based remuneration schemes.

Participants in such schemes would be remunerated for all or part of the work they did in the form of non-taxable loans, in lieu of a salary, which would typically be paid to them by an offshore employee benefits trust (EBT).

The government’s loan charge policy has sought to clamp down on the use of these schemes, with HMRC taking the view that because the loans were never intended to be repaid, they should be reclassified as income and taxed accordingly.

As a result, tens of thousands of individuals – including a sizeable number of IT contractors – have found themselves on the receiving end of life-changing tax bills relating to their past use of loan schemes.

As previously reported by Computer Weekly, concerns about the ability of those caught within the scope of the policy to pay back the sums of money HMRC is seeking have been repeatedly raised by a campaign group and the cross-party Loan Charge All Party Parliamentary Group (APPG) of MPs.

This, in turn, has led to calls for all retrospective elements of the policy to be scrapped, and has seen MPs make abortive attempts to have amendments made to the Finance Bill along those lines.

Following the publication of an independent review into the policy in December 2019, the original 20-year time period it covers was scaled back by about 11 years, resulting in an estimated 11,000 people falling out of its scope.

The policy has also been subject to a crowd-funded judicial review, which sought to have the policy scrapped on human rights grounds. This challenge was dismissed by the High Court, but is in the process of being appealed.

A separate, crowd-funded effort to judicially review the policy on the basis that it breaches EU law is now being embarked upon by a group of individuals affected by the loan charge, with links to the Loan Charge Action Group campaign team.

Banding together under the Loan Charge Judicial Review EU (LCJREU) banner, the group has set out its plans to legally challenge the policy both in England and Scotland concurrently, by demonstrating that it breaches EU law.

“Under EU law, there are four fundamental rights and one of those rights is the ‘freedom of movement of capital’, which LCJREU is seeking to prove is undermined by the loan charge,” said LCJREU in a statement.

“If successful, then EU law overrides the domestic law and the enforcement of the loan charge would be invalidated.”

The challenge is being raised on the back of a joint opinion shared by legal experts Richard Clayton QC of Exchequer Chambers, who specialises in judicial reviews, and EU law specialist Nik Grubeck of Monckton Chambers.

According to the pair, a challenge against the loan charge based on EU law arguments has a “better than 50% chance of success”, prompting LCJREU spokesman Andrew Earnshaw to declare the challenge as the “last and best hope” for those caught in the scope of the policy.

The group has already secured 85% of the £180,000 needed to begin judicial review proceedings.

“We believe that LCJREU is the last and best hope of challenging the loan charge legally and urge people facing the loan charge to chip in and fund it, to make it happen,” said Earnshaw in a statement.

“This is the only judicial review that, if it succeeds, would stop enforcement of the loan charge. Other judicial reviews can only challenge certain decisions made relating to it, but would leave the loan charge in place. So we urge all those facing the loan charge to contribute to LCJREU to allow this challenge to happen.”