The Treasury has come out fighting in its newly published review of the operation of the new loan charge on disguised remuneration (DR) tax avoidance schemes, which is due to come in next month and which has stirred up considerable controversy over claims that some individuals will face severe financial hardship
The new charge on outstanding loans takes effect on 5 April and was originally included in the Finance Act (No.2) 2017. The loan charge works by adding together all outstanding loans and taxing them as income in one year. Where scheme users have repaid loans before the charge comes in, the charge will not apply.
The Treasury was required to do a narrow review of the issue of time limits for tax assessments, as part of an amendment to the 2019 Finance Act, after MPs demanded more analysis of the impact of the loan charge amid concerns that some taxpayers faced substantial demands with no means of payment.
In the 49-page document, released before the 30 March deadline for its publication, the Treasury robustly challenges a number of concerns raised by the loan charge all party parliamentary group (APPG) and others.
On the issue of time limits, the Treasury says the 12-year time limit is not retrospective legislation and does not reopen any closed tax years. It applies for tax years 2013-14 onwards for careless behaviour and from 2015-16 for errors despite reasonable care.
The review states: ‘Time limits in place before the enactment of sections 80 and 81 Finance Act 2019 already allowed assessments to be made for tax years 2013-14 onwards for careless behaviour (six years) and from 2015-16 for errors despite reasonable care (four years).
‘Sections 80 and 81 in effect increase the number of tax years potentially subject to assessment prospectively, one year at a time, until the period that HMRC can assess reaches 12 years.’
The 12-year time limit will not apply where, firstly, HMRC receives information from another jurisdiction which is sufficient to permit HMRC to identify the lost tax and, secondly, where it is reasonable for HMRC to be able to make that assessment before the existing time limit (whether four or six years) has expired.
In addition, the 12-year time limit does not apply to assessments arising from transfer pricing adjustments. It only applies where the offshore transfer makes the undeclared tax significantly harder to identify.
The review states: ‘The government is clear that the legislation is not retrospective. The charge on DR loans applies a tax charge to outstanding loan balances at 5 April 2019.
‘It does not change the tax position of any previous year, the tax treatment of any historic transaction, or the outcome of any open compliance checks.
‘Those who used the schemes can escape the charge by repaying the balances of any outstanding loans. Alternatively, they can seek to agree a settlement of the tax due on their income disguised as a loan, which was due under the legislation that existed at the time.’
Addressing claims that individuals were compelled to use a disguised remuneration scheme or did not realise what type of arrangement they were entering into, the review states that HMRC has not seen cases that support this.
It says that employers cannot dictate what individuals put on their tax return, which is their own responsibility, and points out that ‘taking out these loans would often have involved signing multiple agreements, and most people will have been able to see from their payslip that the money they received was not being taxed’.
The government has received a number of representations that the employer should be liable for the tax due. A review of HMRC data shows that approximately 10,000 companies used disguised remuneration schemes, and around 75% of the overall yield from the charge on DR loans is expected to come from employers. So far, about 85% of the yield from settlements in advance of the charge has come from employers.
On the issue of whether such schemes were register under the disclosure of tax avoidance scheme (DOTAS) facility, the review says HMRC has seen varying degrees of disclosure ranging from the use of a DOTAS registered scheme where the taxpayer includes the correct reference in the correct section of their return, to the use of a non-disclosed scheme, to someone who puts nothing on their return. A review of HMRC data suggests that less than half the known DR schemes were disclosed under DOTAS.
The review states: ‘However, many scheme users and promoters purposefully did not make a full disclosure, often in an attempt to make HMRC’s compliance effort more difficult.
Submissions reviewed by HMRC indicate that some of those using these schemes followed the advice of the promoter in completing their tax return, and in some cases allowed the promoter to complete returns on their behalf.
The Treasury also refutes claims that individuals were under the misapprehension that notification of a scheme under DOTAS and the issuance of an scheme registration number implied HMRC had accepted these tax avoidance arrangements, saying that HMRC literature and spotlight notices made this clear.
The loan charge APPG provided 70 submissions, which indicated that in advance of the charge on DR loans people assumed HMRC was content with their affairs (37%); that their scheme use was fully disclosed to HMRC (19%); or that scheme use was disclosed with no enquiry opened (9%).
The review said: ‘However, in many cases the detail provided has not enabled HMRC to identify the individual and verify their exact circumstances. Where it has been possible to identify the individual from the data provided, HMRC does not accept the claims that are made in a number of cases.
‘It is notable that a large proportion did not state that they disclosed their scheme use to HMRC when filing their selfassessment tax returns.’
The review rejects the assertion that the charge on disguised remuneration loans is contrary to the rule of law, and also does not support the idea of restricting the charge only to disguised remuneration loans entered into after 2011 or 2017 or reducing the tax rate payable, on grounds of unfairness to others.
It does concede there are examples of individuals who want to settle with HMRC but who have not yet received detailed calculations of the amounts due. HMRC acknowledges that as a result of the large numbers of scheme users looking to settle some have had to wait longer for a response than they would want. In response, HMRC has increased the number of people to the equivalent of over 500 HMRC full-time staff working directly or indirectly on work related to disguised remuneration.
The review states: ‘Overall the government’s view is that the charge on disguised remuneration loans is the right approach to ensure fairness for the vast majority of UK taxpayers who pay the right amount of tax at the right time and draw a line under this form of tax avoidance.
‘However, the government recognises the difficulties that some people are facing and is working to ensure that all cases are treated sympathetically, with payment terms that reflect the circumstances of each individual case, and appropriate support wherever needed.’
This support includes a separate disguised remuneration helpline and a new, dedicated team who can offer extra support to more vulnerable customers. HMRC is also making clear that there is no maximum period over which payment can be made, with simplified payment arrangements for those settling under the published terms.
Those with income which is now below £50,000 who are no longer involved in avoidance can have five years to pay without providing detailed supporting information, and those with income below £30,000 can have seven year.
The review explicitly states that, contrary to some campaigners’ claims, HMRC will not force anyone to sell their main home to pay their disguised remuneration debts.
The Treasury says DR scheme usage is continuing, with specific schemes being marketed from offshore locations such as Cyprus, Malta, and the Isle of Man that claim to provide for the avoidance of the loan charge, and that without such a measure it is difficult to tackle.
Estimates suggest there were around 50,000 scheme users, and that the government’s action will bring in an extra £3.2bn for the public finances over five years.
The figures as at 15 March 2019 indicate 26,692 scheme users have registered an interest to settle. Of these, 20,004 have returned their settlement pack with the necessary information, and of those who returned settlement packs, HMRC has issued settlement calculations to 15,649 users.
Financial secretary to the Treasury Mel Stride said: ‘We introduced measures to tackle disguised remuneration schemes, an aggressive and contrived form of tax avoidance which cost the taxpayer hundreds of millions of pounds a year, depriving our vital public services of funding.
‘99.8% of people in the UK go nowhere near these sorts of schemes, and we know that many contractors looked at these arrangements, were appalled and ran a mile.
‘The report we are publishing today explains the background to our action, but crucially also sets out the work we are doing to support vulnerable customers, including those who face the loan charge but also the many others that HMRC deals with in its everyday work.’
Report by Pat Sweet