Beware Loan Charge contractors, a smarting HMRC won’t let sleeping dogs lie

It was never going to completely remove Loan Charge 2019.

On the contrary, some thought it may simply endorse its need, but few thought that the changes Sir Amyas Morse recommended in his 2019 Loan Charge Review would be so wide-ranging, or so readily accepted by the government, writes Tom Wallace, head of tax at WTT Consulting.

It is all down to human nature that how the report is regarded by individuals affected by the charge will very much depend on whether it has helped or ignored their personal plight.

Sir Amyas’ message

Opinions so far expressed very much reflect this division. If viewed objectively, however, the recommendations can only be seen as a better than expected outcome.

The now firm and repeated message to HMRC, ministers, and the Treasury is that many of them were asleep at the wheel. Collectively, they allowed the introduction of legislation with its purpose and design being in excess of a reasonable response to ‘the problem.’ Let’s also not forget – it’s a problem that HMRC’s systemic failures created and worsened as the years passed.

What the Morse Review found

Let’s now turn to the 80-something page document submitted by Sir Amyas.

Firstly, the report recognises that the HMRC mantra of ‘we always said these schemes do not work’ is at best, a rose-tinted view of the past. Even if the mantra held up to scrutiny, Sir Amyas used his review to give HMRC the same reminder that most tax professionals have had to increasingly give the department over the last decade. And that short sharp reality check is this -- HMRC’s view is not the law, and only the courts can decide how the law should be interpreted.

Sir Amyas’ reading is that the HMRC’s view of the law was only clear from the introduction of new law in Part 7A ITEPA 2003, on December 9th 2010, and therefore the loan charge should and could not apply to any loans made before this date. This is not an indicator that the schemes work, and nor does it conclude matters where HMRC has opened enquiries into any of the tax years prior to this date.  The Revenue will now likely be forced to litigate these early schemes and the department is creating a team to put renewed emphasis into doing so. 

Hurdles, teams and terms

This new Loan Charge team will almost certainly look for creative ways to issue ‘discovery assessments’ for these periods. But that would require them to prove deliberate behaviour leading to the under-assessment of tax, which will be a high hurdle for the team to overcome. It’s a hurdle made all the more difficult to overcome due to a series of recent reversals in the tribunals.

But back to the review. For loans received between December 9th 2010 and April 5th 2016, where reasonable disclosure has been made but HMRC have not enquired into the return or issued an assessment, then these too are removed from the loan charge. 

Although Sir Amyas used the term “reasonable disclosure,” the HMRC guidance for taxpayers to use currently uses the term “full disclosure”.  While not saying what full disclosure means in practice, and with the promise of further guidance to follow, HMRC have said (as was the case with those that settled under CLSO1), that a scheme will be treated as ‘fully disclosed’ where a taxpayer included all necessary information on their relevant tax return. No doubt this will be an area of contention between advisers and HMRC. I certainly see appeals and Judicial Reviews on the horizon to test whether an enquiry is open and what disclosure actually means.

More positively, in his review Sir Amyas recognises the unfair result that declaring the loans and suffering the loan charge in one tax year produces. He has remedied this by recommending an equal division of loan balances over three tax years from 2018/19 to 2020/21. 

Loan Charge Conflict 2.0

This will be of little consequence to many, yet it does produce opportunities for some contractors to structure earnings and use reliefs such as those for pension payments to ensure the loans are taxed at the lowest rate. It is unfortunate, however, that the government rejected the call to cap the amount which HMRC can force someone to pay against the charge each year and to write the debt off after 10 years.

While this will be the end of the skirmish for some, particularly those that used arrangements some years ago that HMRC never investigated, it is the start of a new fight for many more.

Those with pre-2010 enquiries will need to consider how they defend the litigation HMRC is about to accelerate. Those with discovery assessments, and to some extent enquiries, need to consider if those are valid now that the enquiry is the only concern. These will be hard battles, and nobody should expect HMRC to give in graciously.  Be aware – the Revenue is undoubtedly smarting under the scathing criticism of their leadership, policies and actions contained in Sir Amyas Morse’s Review. Experience tells us that HMRC is a poor loser. We should not, and we do not expect the loan charge and its connections to go away quietly.

A breather before the backlash

Finally, 2020 is still yet young but this year may prove to be the single most pivotal yet, with HMRC redrawing the battle lines and a number of cases lined up to be tested in the courts. The Loan Charge Review by Sir Amyas has given us all some breathing space and will force all the parties to focus on the key issues and not be further distracted by peripheral matters. There is -- now more than ever – both the opportunity and scope to address the fundamental concepts of tax law, the implications of Supreme Court decisions and the application of these to historical facts. 

Furthermore, now is certainly not the time to think the battle is won and to rest upon well-earned laurels (as is being claimed by too many parties). Instead, this is the time to understand your position, consider carefully how you are going to navigate the choppy waters ahead and prepare for the inevitable backlash.

Profile picture for user Thomas Wallace

Written by Thomas Wallace

Tom is a former HMRC Senior Inspector of Taxes who has worked in and led teams in all taxpayer segments dealing with large multinationals to small businesses.  Tom was appointed Director of Tax Investigations at WTT Consulting in 2020, where he is currently responsible for developing strategies for dealing with HMRC enquiries and client litigation.
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