I read an interesting article in Money Marketing last
week which I thought might be of interest to you.
It concerns the new loan charge tax that could be
demanded from 50,000 people and which 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
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?
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.
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
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
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
Paul Lewis is a freelance journalist and
presenter of BBC Radio 4’s Money Box. You can follow him on Twitter