HMRC’s one-size-fits-all stance is why the Loan Charge scandal pervades, and may never end

When the Labour party proposed what was to later become the Freedom of Information Act in their 1997 manifesto, it was designed to give the public transparency around the inner workings of public bodies, how government makes policy, and how its bodies deliver it. 

Since enacted, there have been more than a few public servants who have regretted a moment of candour in an email, or a careless memo written with only colleagues and confidants in mind who ‘knew what was meant.’

Those affected by the Loan Charge have used the Freedom of Information Act (FoIA) to try and get to the heart of HMRC’s and the Treasury’s policy implementation for a variety of reasons, writes Tom Wallace, director of tax investigations at HMRC dispute advisory WTT Consulting.

Holding HMRC to account

Not least, the affected wish to hold the two government departments to account for what many consider an ill-thought-out piece of legislation that causes just as many problems as it attempts to fix. 

The latest request under the act (responded to on April 21st 2021) was rather simple in nature.

“Please supply all emails between Jim Harra and Ruth Stanier in 2019 that contains the letters DR, meaning Disguised Remuneration”.

Fifteen emails they didn’t want you to see

Despite its simplicity, the request returned 15 emails that shone a light on the conversations around the loan charge which were being had at the highest level of the civil service.

Email 2 has perhaps sparked the most interest on social media where HMRC chief executive Jim Harra writes:

In recent months I have repeatedly tried to obtain legal analysis to understand the strength of our claim with very little success.”

Many have read this to mean there is no legal basis for the loan charge.

Context, relevance and doubt

However, this statement needs to be considered in the context of the sentence immediately preceding it where Mr Harra is describing the main themes of tweets he had been receiving, notably: “We have not obtained decisions establishing that individuals are taxable on DR loans as income.” 

It is therefore evident that Mr Harra was referring to the lack of analysis to support the liability of employees (contractors), rather than employers (promoters) when seeking legal opinion, rather than the loan charge or DR schemes themselves. 

That should not detract from the relevance of the comment, however, given that HMRC has forced many contractors into potentially incorrect settlements by insisting that they are liable for tax properly deemed deductible by their employer instead. Indeed, this is in fact what the judges in the Upper Tier Tribunal case of ‘Hoey v HMRC’ supported, although accepted it was not in their remit to give a determinate judgement on. Should the courts eventually ratify that position, and given the doubt expressed at the most senior levels of HMRC in January 2019, how will HMRC justify the fact that, even today, they tell contractors that they are liable. How will HMRC compensate them?

A‘PR battle,’ in which people’s real lives are at stake

The fourth email is perhaps unremarkable other than the opening line. Mr Harra writes: “Fine, I don’t think the document will win the PR battle for us”. 

I find it rather distasteful that defending the loan charge (which I assume it refers to) is seen as a PR battle by HMRC. These are real lives affected, in unimaginable ways, including some who have made the ultimate decision to bring their suffering to an end. This is not a simple case of the ‘bad’ tax avoider versus the ‘good’ HMRC. People have been duped, lied to, and mislead and are paying an inequitable price. They were not sophisticated investors looking for clever ways to avoid tax, taking advice from IFAs, and going into the arrangements with their eyes wide open. They were not city slickers putting their year’s bonus into a scheme like the average person would stick a tenner on the 2.35 at Haydock!

The Loan Charge scandal may never be resolved

Until HMRC realises this and alters its approach appropriately, then the tax authority will never be able to successfully work with those affected to bring matters to a conclusion.

It is HMRC’s heavy-handed tactics in using a piece of legislation enacted in 2017, that only applies on a specific date in 2019, to sweep away 10 years of their own inactivity of not going after those that sold, and still to this day, sell schemes, that means the “PR battle” is being lost. That is because their approach is simply wrong.

The fifth email lacks some context as it appears to be part of a chain of earlier emails not included in the disclosure. It does however seem to be referring to the terms of the (yet to be announced at that point) independent review into the loan charge

The pool, and the gulf

In the note they discuss the remit and indeed the pool of those to lead the review and where they could be drawn from. Ultimately, Sir Amyas Morse was chosen (by whom, the emails do not reveal), although the email suggests that a retired Upper Tier judge might be appropriate. I do wonder why a recently retired civil servant was preferred to a former tax judge with no ties to government, but perhaps it will need further FoI releases to get to the bottom of that one.

“I pointed out that our work to tackle DR avoidance schemes is just one manifestation of a longstanding antagonistic relationship between HMRC and a sizable section of the contractor industry and their tax advisors, caused by the gulf between our view of what is acceptable tax planning and theirs.” This was a sentence written by Mr Harra after his first meeting with the new Financial Secretary to the Treasury, Jesse Norman, and is captured in email 6.

Jim Harra’s unacceptable ‘acceptable tax planning’

Again, it shows to me the fundamental misunderstanding HMRC has about how contractors came to be involved in DR schemes. “Acceptable tax planning” suggests that the majority sought out these arrangements and entered them willingly in an effort to gain a tax advantage.  It is a narrative that has been at the heart of the work of HMRC’s Counter Avoidance team for many years. It suits them to hold on to the notion that all tax avoiders should be punished and all is therefore fair in love and war. I have by now personally spoken to 1,000-plus contractors who were caught in these arrangements, and with some notable exceptions, these schemes were not entered into for the purposes of tax planning. In fact, they were presented as compliant umbrella companies who were preferred suppliers to the agency used by the end-client, and quite simply if you did not use it, then you did not get the contract. 

There is much evidence that these agencies were being induced with significant incentives (Rolex watches and luxury holidays to name some) and therefore were pushing these arrangements aggressively. So “acceptable tax planning” was not a consideration.

City slicker or retired NHS nurse? To HMRC, you’re all the same

On a related point, in email 10 Mr Harra says: “I doubt if we would ever be willing to accept a narrative that users of tax avoidance schemes are innocent or naïve victims”, which illustrates the point that all users of tax mitigation schemes are of the same mould in HMRC’s eyes.

The attachment to email 8 includes a suggested letter to taxpayers to advise them about their potential liability under the loan charge. In the tracked changes, a user known as [HJ] (possibly Jim Harra given HMRC tends to use a Surname, Forename convention on their computer system), writes: “I know we think the claims by some contractors that they did not benefit financially is rubbish”.

Let me be blunt on this one. Try telling the many clients of mine who are NHS nurses and local authority social workers who are basic rate taxpayers, who had 20% deducted from their wages by the promoters and instead of handing it over to HMRC in tax, pocketed it in fees, that they gained financially. Show me HMRC, and them too, how they are better off? They clearly are not. So, are these the same contractors earlier that were seeking “acceptable tax planning”?

It is this one-size-fits-all attitude that has prevented HMRC reaching any sort of pragmatic solution to bring this to a conclusion years ago.

A mess HMRC inaction has created, which HMRC doesn’t know how to clean up

The release of these emails under freedom of information rules gives an insight into an organisation that has created a mess that it does not quite know how to clean up. Years of inaction by HMRC has left them open to criticism, entrenched in a position that they find uncomfortable and hard to defend without persisting with the view that all those caught in DR schemes are wilful tax avoiders, deserving of the harshest treatment. These FoIA disclosures only heap more questions about HMRC’s handling of the whole affair. Standing back from the detail, it all rather raises the question of whether the Freedom of Information Act will be next on the government’s agenda for ‘modernisation.’ We can only hope it is not.

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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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