Returning from a few weeks holiday, I was looking forward to reading suggestions as to what Sir Amyas Morse might recommend to government which I assumed would be made by those senior members of the profession who, it might be argued, are responsible for bringing about the mess that has resulted in the misery of so many contractors and employees being faced with the Loan Charge. Instead, there is a deafening silence from that quarter. Short of calls from lobby groups for the total repeal of the Loan Charge – a move which is unlikely to be acceptable to any political party given the signal it would send to promoters of tax avoidance – I have yet to see any suggestions made as to what Sir Amyas Morse might recommend to government to be a fair and just solution. There is much comment on how HMRC and the government failed to act and have since sought to recover tax in a manner which circumvents, or undermines, the established checks and balances of the systems for recovery of tax by way of PAYE and self-assessment, but no positive suggestions as to how to address the issue.
So, given that I have previously defended the Loan Charge in principle (see earlier posts), here are my suggestions as to what actions the government and HMRC should now take to resolve the plight of those contractors and employees faced with disproportionate and unplanned for tax bills if either they choose to settle with HMRC on the terms offered, or face up to the Loan Charge and the dilemma of a further charge if the loans outstanding are released.
First, a line must be drawn to distinguish between (a) those cases in which the individual was knowingly participating in a tax avoidance arrangement and was in receipt of money for work done and on which he or she knew that PAYE tax had not been accounted for; and (b) those cases in which (typically) more modestly-remunerated contractors and employees were, in effect, made victims of the greed of others and obliged to accept payment for their services in the form of advances on loan under arrangements promoted to, and established by, their clients, or by an intermediary, as a condition of being given the paid work in the first place. This might also include those who can adduce evidence that they were persuaded to participate in such arrangements on the basis of clear professional advice that they were ‘acceptable’ to HMRC.
Where exactly that line is drawn may be contentious, and there will doubtless be dispute as to the side on which a particular taxpayer should fall.
Those within (b) should then be treated, for all tax purposes, as if the arrangements were, so far as they and HMRC were concerned, a ‘sham’ (whether or not that is strictly correct as a matter of law), HMRC accepting settlements on the basis that the amounts actually received by such individuals were payments of earnings received in the years in which the loans were advanced. This then leaves the question of whether such amounts received should be treated as either (i) having been received net of PAYE tax, on the assumption that the ‘employer’ had deducted and withheld tax and NICs on the grossed-up amounts of such payments (so entitling the individual to a credit for the PAYE tax which should have been deducted from the grossed-up payments) or (ii) as gross payments on which the employee is liable to tax. However, given that, in many cases, HMRC will not be in a position to make a Reg 72 or Reg 81 direction (making the employee primarily liable for the tax) and will in any event be out of time for recovering the tax from the employee, the pragmatic solution may be for the government to accept – on a concessionary and ‘without prejudice’ basis – that such payments be treated as having been net amounts (per(i) above). HMRC should then accept, notwithstanding that ss 554(5A) – (5C) ITEPA 2003 provides otherwise, that the ‘disguised remuneration’ rules and the Loan Charge have no further application in these cases. Insofar as HMRC is in time to recover the PAYE tax and NICs from the ‘employer’, they should make every effort to do so, but if they are now out of time for doing so or for making a discovery assessment, HM Treasury should accept that this is the price to be paid for failure to have acted within the normal time limits and in the proper manner. Of itself, this is not a complete solution as the trustee (or other loan creditor) may well take the view that the arrangement is not a ‘sham’ and, so far as they are concerned, the loan remains outstanding unpaid. However, the issue then becomes one between the individual and the trustee, rather than between the individual and HMRC.
In these situations, HMRC should also accept that the inheritance tax rules relating to 10-yearly charges (under s64 IhTA 1984) and ‘exit’ charges (under s 65 and s72 of that Act) are of no application. This being on the working presumption that amounts advanced to the individual were payments of earnings for duties performed and so both they and the funds applied in payment are, and have at all relevant times been, outside the scope of the inheritance tax rules.
Whilst such an approach should be capable of justification as being an exercise of HMRC’s residual powers of ‘care and management’, I accept that it might be considered to ‘fly in the face’ of the current position under case law (particularly the Glasgow Rangers case) and the ‘disguised remuneration’ legislation as it stands. Legislative change would go a long way to provide certainty and remove the risk of challenge, but may be far down the list of this government’s priorities.
For those within (a), it is more difficult to see on what basis the current rules should be relaxed or repealed. However, one unfairness in the current system is the punitive effect of a combination of the Loan Charge, the further charge(s) arising on a release of a loan, and the complex rules (in ss554Z11(B)-(G)) affording relief from ‘double taxation’ when a given sum has been the subject of multiple unpaid charges to income tax (such as the original earnings charge on the amount contributed to the trust, any advance on loan made post 2010, any earlier writing off of the loan, the Loan Charge itself, and a charge on a subsequent release of the loan). I have suggested that those rules (which were rewritten in 2017) need to be revisited by Parliament so that, in effect, if the Loan Charge bites, earlier occasions of charge for which HMRC is out of time to recover the tax from any and every party are then ignored altogether in determining any amounts of tax outstanding.
David Pett
David Pett, Tax Barrister 