Loan charge experts reveal litany of problems since Morse Review

HMRC has reacted “quite well” to the Loan Charge-centric Morse Review, but “something is wrong” with its stance on ‘reasonable disclosure,’ Time To Pay and the spreading election.

Its “much-improved” guidance needs grouping too; more of its letters need previewing; its reminders need better labels and timing, and its enforcement with promoters must toughen.

Plus, the Revenue’s seven-part process for Loan Charge contractors and other disguised remuneration taxpayers to get a refund needs removing from the “too-hard basket.”

Such was the list of criticisms from expert witnesses at Monday’s part one of a Lords Economic Affairs Finance Bill Sub-Committee inquiry -- the ‘Loan Charge follow-up.’

'Failings of HMRC'

Effectively rating HMRC’s performance since last December’s Morse Review as a ‘good but could do much better’ was the Low Income Tax Reform Group’s Meredith McCammond.

“In terms of the comments Morse made around the failings of HMRC, in terms of attitude to taxpayers who were in real distress, I think HMRC took those on board”, she began.

“That said, even though the framework is there for the Morse recommendations to take effect, there are barriers in the way of people actually being able to benefit [from them] in full.

“And I’m also not entirely convinced that the Morse Review has been the closure that I think we were all hoping for from the loan charge.”     

'Taxman set reasonable-care bar quite high' 

The LITRG’s technical officer further explained: “In terms of the people who were in loan schemes between 2010 and 2016... they may have considered they made reasonable disclosure of their loans on their tax returns and that takes them outside of the loan charge now according to Morse.

“[But] my understanding is that HMRC has set the bar quite high in terms of what it considers ‘reasonable disclosure.’ And that means not as many people are benefitting from the Morse recommendations. ”

So while reasonable disclosure’ might not look reasonable to contractors (partly because after Morse recommended it the government upped it to ‘full disclosure’ meaning multiple pieces of information are required of taxpayers), the three-year spreading election is not living up to expectations either.


“I think HMRC envisaged about 21,000 people might benefit from making the spreading election but actually less than 2,000 [did],” Ms McCammond added, calling the numbers “disturbing.”

“There’s something not right…First, the form is online, and the paper version is quite tricky to get hold of. But [secondly either] form….asks you a whole raft of other questions.”

“And the people we represent just don’t have enough information or insight about their situation to be able to complete that form, and so because they can’t complete the form, they can’t make the election.

“There’s also the problem that HMRC made the election ‘irrevocable’… and that [term is] going to really scare you.”

'Debt Management won't deal with it'

Another expert witness giving evidence to the committee said there was a fourth deterrent to selecting the option to defer payment to HMRC over three years, versus one year pre-Morse.

Taxation magazine editor-in-chief Andrew Hubbard, formerly of the Chartered Institute of Taxation said: “The effect of the spreading election is not to just defer the payment; it’s actually to defer the liability.

“But the Revenue’s Debt Management unit won’t deal with liabilities until they’ve actually accrued. So if you say ‘I want to spread this over three years’ what you cannot do with Debt Management is arrange a payment plan over a two, three or four-year period, because some of that liability hasn’t yet arisen in law. And therefore, they won’t deal with it.”

'Unprecedented times need Revenue's acknowledgement'

The other Morse-recommended reprieve from the Loan Charge is Time To Pay, but LITRG told the committee that HMRC stats indicate that not many contractors have been granted it.

“Only 289 Time To Pay arrangements have been made [by HMRC] for people paying the Loan Charge. Now, that’s a very, very small number of TTP arrangements,” the group said.

“[This scheme should be for] people who might need some extra time to be able to pay their Loan Charge amounts. It has to be recognised that we’re in unprecedented times with covid-19 -- there have been job losses and there have been income losses. And even with the five-to-seven-year ‘no questions asked’ TTP, [we] just don’t think that [the scheme is] going to be sufficient.”

Implying a similar concern about adequacy in his evidence, Mr Hubbard said it would have been “useful” if HMRC had issued reminders to taxpayers ahead of the September 30th loan charge payment deadline.

'Database sweep'

For Ms McCammond, it’s more that the Revenue needs to clearly mark what it does send through Loan Charge contractors’ doors ahead of important deadlines.      

“Around the summer, HMRC wanted to issue ‘notices to file’ letters so they did a sweep of their database to work out all of the people who they thought needed to complete loan charge tax returns.

She continued: “And they issued these letters telling them that they needed to go ahead and file their tax returns by September 30th. But those letters were just standard ‘please file your tax return’ letters. They didn’t have any reference to the Loan Charge on them.”

But her sharpest criticism came just before Lord Bridges disclosed that despite it having now called in the Loan Charge, the Revenue estimates that the number of people involved in DR schemes has somehow increased to 30,000 (in 2018/19), up from 22,000 (in 2013/14).

'Scheme bosses aren't scared of HMRC'

“Promoters have had really little fear of HMRC and the promoters regime to date,” Ms McCammond said.

“I’m not convinced that tweaking that regime, or adding any kind of new measure like making them get Professional Indemnity Insurance, is really going to have much impact.”

She concluded: “The only thing that can stop promoters is if HMRC…find a way of pinning the promoters with either the penalties or the PAYE that their associated entities have avoided. They [should] find a way of pinning those personally on the directors.”

'Unforgiveable, and gross'

“Why do you think they [HMRC] are not doing that?” asked Lord Forsyth. “I don’t really mind about well-heeled investment bankers and people who are running schemes getting caught.

“The thing that I find unforgiveable, is that people have had their lives ruined because they were brought into schemes, sometime by their employers… and the people responsible for this are not being held [accountable]…What has happened here is gross.”  

Pointing out that HMRC estimates that 6,300 tax returns were recently filed with loan charge amounts in them but 12,000 people who HMRC expected to file did not file any return at all, the LITRG’s Ms McCammond said “something [is] wrong, somewhere."

'Only something fundamental can break the impasse'

And added: “The low number of loan charge tax returns being filed is really key. A lot of people simply don’t have enough information [to file]…because their employers put them into the schemes behind their backs.

“Unless something fundamental changes, unless HMRC starts writing to these people and saying to them, ‘Look you; we’ve got data on you; we know you were in this scheme on this date with this ‘umbrella’ company, I don’t think the impasse is going to be broken. I think [that otherwise], it’s at stalemate.”

She also said that whereas HMRC sometimes previously used “inflammatory language” in its letters, the department now seeks feedback up front, yet not with all its letters and not always with much notice.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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