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Paul Lewis: Why HMRC’s latest clampdown goes way too far

The new loan charge tax that could be demanded from 50,000 people sets a worrying precedent

No one is more vitriolic about tax “evoiders” than me. Just the other day, I argued with a friend who was getting a four-figure sum out of the bank to pay his builder in cash because “it would be cheaper”.

So how can I – a scourge of contractors who pretend to be companies so they can pay themselves in lightly taxed dividends – be sympathetic to another group – the 50,000 now in HM Revenue & Customs’ sights who paid little or no tax by being remunerated with an interest-free loan outside the income tax scope?

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People often say I fail to distinguish between tax evasion, which is illegal – for example, hiding money offshore – and tax avoidance – the use of tax laws in a creative way to pay less tax – which is, they say, legal. But that binary choice is not realistic.

I explained the word evoidance in my Money Marketing column last April as “the grey hinterland where something thought to be legal avoidance turns out to have been outside the law all along”.

Unlike more complex tax evoidance wheezes, the loan schemes I want to talk about used the simple fact that, if I lend you money which you repay, that loan is not counted as income and so is not taxable.

Instead of paying people for the work they did, the employer or engager paid a third-party company – usually offshore – which lent that money to its clients interest-free. Those payments were considered to be non-taxable. Loans were due to be repaid in, say, 10 years but the idea was that would never be enforced.

Instead of losing 32 per cent or 42 per cent of their pay to tax and National Insurance, contractors paid a much smaller amount – 5 per cent or 10 per cent – by way of a fee to the scheme operators. Some of those who joined such a scheme tell me the charges were higher – almost as much as the tax that would have been due.

Stunning in its simplicity, the scheme was sold to people as passed by tax QCs and accountants. Indeed, even HMRC seemed to accept them for a while – at least I am told that, for many years, it did not raise any queries when people put the details on their self-assessment tax forms and in the declaration of tax avoidance schemes.

Paul Lewis: ‘Evoiding’ the issue – when legal tax avoidance is anything but

However, the taxman did raise major questions when the football club Rangers started disguising the pay of its players by putting their money – or a big chunk of it – into a trust which then lent them that cash interest-free.

The case went through the courts with one judgment agreeing with HMRC and another supporting Rangers. Finally, in July 2017, the Supreme Court ruled the scheme was artificial and the employer – Rangers Football Club – was liable for the tax that had been evoided. RFC is now in administration.

The case gave little clarity to thousands of smaller cases and HMRC would face a long and expensive battle to take numerous schemes through tribunals and the courts where winning was not guaranteed.

So even before the judgment, the government decided to cut through the Gordian knot by passing a law which allowed HMRC to recover the equivalent of the tax evoided. This is the notorious loan charge scheme in the Finance (No. 2) Act 2017.

The people affected will, in theory, have to pay all they owe on 5 April. Jolly good, some say. They thought they would avoid the tax paid by other colleagues who were employed in the normal way. Now they have to pay. However, there are very worrying aspects of this law.

First, it recovers tax HMRC says was due back to 1999. Normally, unpaid tax can be recovered for four years or six in some cases. The 20-year recovery is normally confined to deliberate and criminal acts of evasion.

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Second, the law is retrospective. Treasury minister Mel Stride denies that is the case, saying on Money Box that “these schemes have always been ineffective. They have never worked. They have always been tax avoidance”.

But I cannot see how a law passed in 2017 allowing HMRC to recover money back to 1999 is anything but retrospective. If HMRC can get away with that, it can do it again in other areas, forcing people to revisit tax they thought was settled back to the last century.If these deals never worked, why does HMRC not just pursue people through the normal means? Why pass a special law?

Third, many of those affected have told me they had no choice. The employers and engagers loved these schemes which saved them employers’ NI contributions and the cost of workers’ rights so they forced them on their hapless workers.

Finally, although HMRC claimed in November that the average charge of those who have settled is £23,000, the reported size of the sums demanded from others who cannot afford to settle is so big they could bankrupt them, forcing them to sell their homes and live in poverty for the rest of their lives.

I hate tax evoidance. But this goes too far.

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box. You can follow him on Twitter @paullewismoney


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Surely HMRC could have avoided all of this work by just charging the tax due at the end of the 10 year term of the loan and then every thereafter. Just enforce the existing rule instead of reinventing the wheel!
    “Loans were due to be repaid in, say, 10 years but the idea was that would never be enforced”

  2. take the high road 1st March 2019 at 1:20 pm

    ….and HMRC will probably take no notice of a journalist who can’t spell…!

  3. An interesting comment regarding your friend who is engaging in tax evasion. Presumably you have informed HMRC about him and the building firm engaged in tax evasion which “you hate” Or is it ok for friends of yours to escape the justice you expect of others? If you fail to reveal this to HMRC are you duplicitous in the tax evasion?

    • Surely it is not for Mr Lewis to supply the deficiencies of the official force?

      I’m sure he’d be more inclined to once financial advisers start meeting their own legal obligations report money laundering…

      • Adam – I agree with Paul Fletcher as some of us DO meet our legal obligations with regard money laundering. Paul has publicly stated something that were we as advisers or accountants to have done and said so publicly, we could go to prison for!
        Paul Lewis cannot hide behind his journalistic credentials, he has stated publicly that his friend is conspiring in a criminal act (tax evasion)

  4. Trevor Harrington 1st March 2019 at 1:46 pm

    There is surely a case here for saying to these tax fraudsters :-

    “at the time you did this, surely you must have used you common sense! What on earth made you believe for even one stupid second that you might get away with receiving what was patently obviously an income, and call it a non taxable non repayable interest free loan?”

    Having said that – incredibly stupid as they obviously were, I think you will find that HMR&C will not be bankrupting any of them … but what they will do is to take the tax from them year by year, over an extended period of years until these fraudsters have redeemed their debt – and quite right too – they are lucky that they are not facing a term in jail.

    Please also bear in mind that if these people were allowed to not repay the tax which they so obviously were liable for … who do you think will be actually paying for them … US OF COURSE.

    Allowing them not to pay is no more credible than a false claim on an insurance policy, or indeed claiming on an insurance policy that did not exist (many if not he majority of the current PPI claims, and most if not all of the endowment claims?) … it is fraud, and it is a criminal offence.

    • Julian Stevens 1st March 2019 at 4:01 pm

      That’s what I thought ~ bankrupting these people would dramatically reduce the amount of tax HMRC would be able to collect, so they’ll seek instead to recover it by instalments.

      That said, it seems that until recently HMRC more or less turned a blind eye to such schemes, so it is perhaps a bit harsh, at this stage in the game, to be raining down hot bricks upon those who’ve used them. Fairer, I think, to have said that the days of a blind eye being turned are over, so wind up any existing such schemes in the coming 12 months and think very carefully before embarking on any new ones.

  5. Will this still be in our consciousness next month? Thanks for letting us know what the problem is, but as ever, how about a suggestion or solution – even a call to arms! that we can add some backing too that may just do something about it – surely an online petition at least?

  6. HMRC play the same “ring-a-ring O roses” as many other bureaucratic faceless non entities..

    I suits them to dance around like little girls in summer dresses, their gold ringlets tied back in a neat pony tails …
    Their only duty of care is to stop their knickers falling down around their ankles !

  7. Seasoned Cynic 1st March 2019 at 2:42 pm

    If assurances were given that this scheme was legitimate then surely those who promoted this should be paying back something? OR, maybe they can be sued?
    I agree that tax evasion should be addressed but today there seems to be no difference between evasion which has always been illegal and avoidance which is using the rules to your advantage.
    If HMRC can now say that both are illegal and they can go back 20 years, what other aspects should we be worried about? Pension Tax Relief for SIPPs?
    It is the degree of retrospection achieved by passing a special act that is the worry here.

  8. Very worrying and also extremely unfair on the people affected.

    HMRC are clearly out of control and do not have anyone holding them to account. I’ve seen articles on their nudging and lies elsewhere.

    We should all be concerned that HMRC will try this sort of disguised retrospecive taxation in other areas.

    Surely a public inquiry is required to look into this matter? The individuals in HMRC who invented egregious and contrived policies like this should be held to account and publicly shamed.

  9. “contractors who pretend to be companies so they can pay themselves in lightly taxed dividends”

    Contractors pay roughly the same amount of tax as employees, when you take into account corporation and dividend taxes. The main part missing is employers NI which, funnily enough, should be paid by the employer.

    Also, contractors are not normally doing this purely for tax reasons. There are many other reasons involved. So don’t be such a d*** to an important part of the workforce who, on average, pay a lot more tax than they would of they were employed and take much more of a risk than employees.

  10. Trevor Harrington 2nd March 2019 at 10:08 am

    It has always been the same with HMR&C, and I have told clients this fact for 38 years.

    Generally speaking, they will not question your tax return (self assessment) and chase you for underpayments until such time as it is worth their while to do so … SO BE SENSIBLE AND USE YOUR COMMON SENSE.

    They may well have a “sporting interest and they may well be prepared to accept small accidental indiscretions” but they will pursue obvious falsification.

    I cannot emphasise this enough … falsifying your tax return is a CRIMINAL OFFENCE … and just in case you are wondering, if you do it, you are stealing from ME!!

    In this instance, employing someone and then telling them that you will pay them through an interest free loan so that they do not have to pay income tax or national insurance, is pretty bloody obvious … I have absolutely no sympathy whatsoever, much the sane as footballers and celebrities who invested in the “film schemes” who git more tax relief on the contribution than the contribution itself …

    These instances of blatant tax fraud should certainly be reclaimed … the only concession to the perpetrators is that they are not being locked up for a very long time.

  11. Paul, might I suggest trying to avoid conflating this specific issue, with the issue of HMRC being allowed to retrospectively change the rules.

    On this specific loan arrangement scam, it is 100% obvious to everyone that this was a deliberate attempt to evade paying the income tax that they were due to pay. I have no sympathy at all with anyone who claims they didn’t know this was wrong, when they were told they could have their pay as a “loan” and never have to pay income tax on it, or actually repay the loan. It was a 100% deliberate attempt to get very highly paid people off paying income tax everyone knew they should be paying. Trying to suggest otherwise simply insults the intelligence of your readers.

    However the full weight of the law should primarily fall on the promoters and those administering these scam schemes. That does not mean that those that enjoyed vast tax savings should not have to pay all that they should have paid in the first place, why shouldn’t they?

    As to HMRC being allowed to go back and retrospectively change things, that is a different question and I agree that they should not be allowed to, other than where there has been a deliberate and ruled illegal method of tax evasion.

  12. “I explained the word evoidance in my Money Marketing column last April as “the grey hinterland where something thought to be legal avoidance turns out to have been outside the law all along”.”

    The word Paul is looking for here is “evasion”. The fact that it is outside the law – and always was – makes it evasion.

    If I steal a car and get away with it for six months, that’s theft, not “theftance”.

    If I kill someone and it takes five years before someone sees the hand sticking out of the back garden, that’s murder, not “murderance”.

    If I evade tax and it takes HMRC twenty years to catch up, that’s tax evasion, not “evadance” and certainly not avoidance.

    And there is nothing retrospective about eventually being punished for it.

    In this particular case, by design, it took twenty years for there to be irrefutable proof that the loans were a sham and were always going to be rolled over indefinitely and not paid back. Deliberately structuring the scheme so that it takes 20 years to get caught does not mean that it’s retrospective when you get punished 20 years later.

    • As an IT consultant you apply for a job with a local firm. At the subsequent interview you are told “you’re hired, pop down the corridor to HR where they will sort out your contract”.

      The HR boss says “congratulations, on your appointment, but before we can sort out your contract, we need you to set-up a company which we will pay instead of paying you directly. This is a cracking avoidance wheeze for us, because we don’t have to make any NI contributions for you, nor do we have any employee overheads to worry about, so we can avoid a lot of cost and you can be better paid as a result. Call this number and these people will sort you out”.

      So the IT consultant does as asked and calls a firm of accountants in Jersey. They go through everything and explain how the company will be set-up, how the IT consultant will be paid and how he will save a load of money on tax.

      The IT consultant scratches his head. He needs this job and it has suddenly got a lot better because the accountant has just told him he will have a lot more money in his pocket because he is able to reduce his tax liability. The IT consultant thinks to himself, “this sounds too good to be true, but this guy’s an accountant, so he knows about these things.”

      “Hang on a moment”, he says. “This sounds too good to be true. Is it legal?”

      “Absolutely”, says the accountant. “Look, I’ve even got legal opinion from a Tax Barrister in London, that confirms its legal and it works”

      “Are you sure?”, asks the IT consultant, who’s isn’t an accountant, or a tax barrister, or a financial adviser, who all know everything there is to know about tax.

      “Definitely”, says the accountant.

      The end. Who is really to blame here?

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