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?
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.
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.
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