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Appeal to Magna Carta forces UK government to reconsider retrospective loan charges

Thursday, 10 January, 2019

Opposition MPs have forced the UK government to review the loan charge being levied retrospectively on contractors who used disguised remuneration schemes to avoid income tax.

Loan charges were legislated in Finance (No.2) Act 2017 with retrospective effect against contractor loan schemes, which were used for decades before they were finally disallowed by rules introduced in Finance Act 2011. Anyone with a disguised remuneration loan still outstanding on 5 April 2019 will have to pay the entire income tax and national insurance contributions deemed by HM Revenue & Customs to have been avoided.
The charges are expected to cause severe financial hardship for large numbers of people, though the repayment terms have been slightly eased since HMRC’s original announcement that the whole charge would have to be paid immediately. Some of the estimated 50,000 affected taxpayers, those with annual incomes below GBP50,000, will be allowed to pay the charges off over five years.

Last September, a group of hundreds of contractors landed with heavy loan charges announced a judicial review challenge against HMRC, alleging that the charges breach their human rights to their property. In December 2018, they were backed by more than 100 MPs who signed a parliamentary Early Day Motion, tabled by Stephen Lloyd MP, calling on the government to revise the legislation. HM Treasury has so far resisted the pressure, but this week’s crunch Commons vote on Finance (No.3) Bill, which will set tax policy for the rest of the current two-year parliament, forced its hand. Several MPs urged the government to rein in HMRC’s aggressive enforcement policy, which, they said, is likely to cause some of their constituents to lose their homes, go bankrupt or even commit suicide.

An amendment, clause 26, was duly tabled by Liberal Democrat MP Edward Davey, requiring HM Treasury to re-assess the likely effects of the loan charge policy before it comes into force on 30 March, and to present its report to parliament. Although Davey supported the Treasury’s introduction of loan charges in Finance Act 2017 to stop future abuse, he criticised its ‘gross unfairness’. ‘The review [proposed in clause 26] aims to focus the minds of Treasury ministers on the unfairness of the retrospective nature of the current loan charge legislation in two ways’, he told the House of Commons. ‘First, it would show how that retrospective nature is even more severe than non-retrospective but backward-looking proceedings for the recovery of lost tax elsewhere in our tax legislation. Secondly, it would show that the test of reasonableness included in proposed new section 36A, if applied to the loan charge, would in fact prevent any retrospective tax collection from the loan charge.’ HM Treasury should, said Davey, ‘ditch the retrospective nature of this measure, delay April’s implementation and amend the charge so it focuses only on payments made after 2016’. The loan charge, as introduced, offends against the rule of law, he added. ‘It is the sort of taxation that led the barons to rebel against King John and gave birth to Magna Carta. It is simply not acceptable for a government to introduce a law that makes illegal something someone did years ago, when that action was considered legal.’

Treasury minister Mel Stride defended the rationale behind the policy, which, he said, was to defeat ‘grossly aggressive and unfair tax avoidance’. He also denied that the loan charge was retrospective, because, he said, the schemes were ‘defective’ at the time when they were entered into, and had been taken through the courts on many occasions.

However, he accepted the amendment in order to avoid a last-minute division on the Bill, given the severe time constraints on parliamentary time. ‘It is absolutely right that, when HMRC deals with the public, it has a strict duty of care, a duty of proportionality and a duty to be as sympathetic as it can be relevant to the circumstances of those with whom it is dealing’, he said.