Loan charge: MPs call on financial secretary for new independent review into HMRC policy

MPs are calling on HM Revenue & Customs (HMRC) to suspend its enforcement of the UK government’s controversial loan charge policy on the basis that there remains no “relevant or justified legal basis” for it.

The instruction is featured in a letter to Lucy Frazer, financial secretary to the Treasury, signed by members of the 245-strong All-Party Parliamentary Loan Charge and Taxpayer Fairness Group.

The letter says: “The loan charge was not properly scrutinised by Parliament when introduced, nor does it have any relevant or justified legal basis – it should never have been passed and the government must now rectify this by announcing a legislative change, as well as instructing HMRC to pause any enforcement of the loan charge and associated accelerated payment notices.”

The seven-page missive also calls on Frazer to answer 10 “extensively researched” questions about the loan charge, which it claims neither the Treasury nor HMRC has fully addressed in their responses to date when quizzed about the inner workings of the controversial policy.

Announced in the 2017 Budget, the loan charge policy is designed to help HMRC claw back the money it claims contractors in various industries – including IT – avoided paying in the past by opting to have part of their salary paid to them in the form of non-taxable loans or annuities.

These loan-based remuneration schemes were typically run by offshore employee benefits trusts, and were erroneously marketed as being an HMRC-compliant means for contractors to bolster their take-home pay by artificially minimising their employment tax liabilities.

Thousands of IT contractors who took part in these schemes between December 2010 and 5 April 2019 have since been landed with six-figure tax bills from HMRC through the loan charge policy, reportedly resulting in mass bankruptcies and at least eight suicides.

The retroactive nature of the policy has seen HMRC repeatedly criticised for pushing ahead with it, as well as the fact that its efforts to clamp down on disguised remuneration schemes are disproportionately targeted at individual participants rather than the organisations that run them.

Incidentally, one of the questions put to Frazer in the letter touches on this point, while also seeking confirmation from her about the precise number of loan scheme promoters and operators who have been prosecuted, convicted, arrested or fined through HMRC’s loan charge enforcement activities.

There is mounting anecdotal evidence that many of the contractors who end up enrolled in these schemes have done so unwittingly, having been forced by their end-clients to provide their services through a non-compliant umbrella company that acts as a front for the scheme. 

Under the terms of the loan charge policy, individuals have few avenues available to them to challenge or appeal against the sanctions handed down by HMRC, which is another area the letter calls on Frazer to address.

But the standout questions addressed to Frazer in the document centre on the outcome of the 2019 independent review into the loan charge policy by Lord Morse, which saw the policy’s look-back period cut by more than 10 years.

“The primary conclusion of the Morse report was that the ‘loan charge should not apply to loans entered into before 9 December 2010, being the point at which the law [on the use of disguised remuneration schemes] became clear’,” the letter says.

“That legislation, announced in December 2010, only affected employees – there was nothing on the statute book for another seven years suggesting they did not work for the self-employed. The 2011 legislation only applied to employer-employee loans paid from a third party. It did not apply to self-employed arrangements or employed arrangements where no third party was involved.”

As previously detailed by Computer Weekly, the Morse Review’s conclusion that the law on using disguised remuneration schemes has been clear since 2010 has been repeatedly challenged by the cross-party group of MPs that make up the Loan Charge APPG, as well as stakeholders from across the contracting community.

In the letter, the MPs claim that the law was “categorically not clear” on the use of loan-based remuneration schemes until 2017, which is what prompted HMRC to propose the policy in the first place.

“As financial secretary to the Treasury and a QC, will you now make a public statement to both challenge and rectify that flawed and unsound conclusion, by confirming that the loan charge legislation will be amended to reflect the reality of the correct legal position, which was clearly misunderstood by Lord Morse at the time of his review,” the letter states.

The letter also requests that Frazer confirm the circumstances and criteria used to determine who would assist Lord Morse with compiling the review, following the disclosure of freedom of information requests that suggest this process may have been influenced by HMRC and the Treasury.

The letter concludes with a call for a “fresh and fully independent review of the loan charge” to be carried out, in the face of growing cross-party support across the House of Commons from MPs and peers who disagree with the policy.

“We hope that you can now see the loan charge is not only a deeply controversial policy that undermines the rule of law, but also that it is a flawed policy brought in without proper understanding and with misleading rationale,” says the letter.