For the tax avoidance of doubt: In light of the review into the controversial loan charge, what are the options?
With reports of people losing their homes, going bankrupt, and even committing suicide, it’s clear that the government’s so-called “loan charge” is hugely problematic.
Tens of thousands of freelancers and contractors are being chased for retrospective tax, with some expected to pay debts that date as far back as 1999.
Why? Because they signed up to schemes that used a legal loophole, by which employers paid freelancers through a loan structure, rather than through a salary or invoice, therefore allowing both the employer and contractor to avoid paying tax.
Tax avoidance doesn’t tend to invoke sympathy, but the problem here is that many sole traders who signed up to the schemes were acting on the advice of employers or accountants after being told that the “disguised remuneration” loans were perfectly legal and low-risk.
However, the government started toughening up on tax avoidance back in 2016, and decided to act retrospectively, giving anyone involved in disguised remuneration schemes until 5 April 2019 to settle the unpaid tax – or face a charge.
HMRC is hoping to get back £3.2bn from the policy.
It is estimated that around 50,000 people are affected, with some tax bills said to amount to as much as £1m, according to the Loan Charge All-Party Parliamentary Group.
While the deadline to declare your tax situation passed almost six months ago, there have been persistent calls for the government to scrap the highly controversial charge.
Last week, chancellor Sajid Javid backed a review into the policy, leaving questions looming about whether the so-called “draconian” charge could be abolished. The outcome of the review will be published in mid-November, to provide some clarity to those affected before the self-assessment deadline in January.
However, while the probe has been welcomed, campaigners are disappointed that the loan charge hasn’t been put on hold until the verdict of the review is known.
Mike Cherry from the Federation of Small Businesses argues that it is unreasonable not to suspend the charge, because it means that sole traders could end up with just two months to settle up. Bear in mind that many businesses are already worried about the unpredictability of the current economic climate, and are struggling to plan for the future as a result.
Cherry points out that many of the people affected are not financial experts or high earners, and some are at risk of losing everything.
“For me the real scandal here is how these schemes got so large,” says George Turner from TaxWatch UK.
“Clearly not enough was done by HMRC to counter these schemes in the past, which allowed them to metastasise and grow to the point where tens of thousands of people were using these schemes over a number of years.”
Turner argues that historic inaction from the tax office is partly to blame for where we are today, and he suggests that the government take a look at whether the loan charge should go back so far.
There are also calls for HMRC to do more to demonstrate that it is pursuing those who encouraged contractors to use these schemes, rather than just the individuals who were talked into using them.
“The people promoting these kinds of schemes are bottom feeders who have absolutely no shame in exploiting people,” says Turner.
So if you have been involved in a contractor loan scheme in the past, what should you do?
If you haven’t yet engaged with HMRC, it’s not sensible to wait. By talking to the tax office, you will at least be able to reduce some uncertainty about your financial situation.
Taxpayers who have already settled should do nothing, while those who are paying by instalments should continue to pay as agreed, says George Bull, senior tax partner at RSM.
“Those who have provided all the required information by 5 April 2019 and are waiting to finalise a settlement can do so if they wish. However, HMRC has indicated that they may wish to wait for the government’s response to the review before settling.”
If you’re not settling the tax you owe, you still need to provide information to HMRC by 30 September 2019 to avoid incurring a penalty. And of course, if you’re liable to pay the loan charge and this changes as a result of the review, you will be updated about the next steps in due course.
Also ignore anyone who advises you to use a new scheme to get around the loan charge. As Turner explains, this could end up leaving people facing even greater hardship, or possibly even criminal charges.
The retrospective nature of the loan charge has led to growing criticism from the tax profession. Bull thinks it is highly likely that the outcome of this review will inform how HMRC tackles tax avoidance in the future.
Indeed, if the tax office is allowed to come down so hard on people who were involved in these types of schemes 20 years ago, surely the risk is that it could do the same with others. As Cherry says: “Many people who are playing fair when planning their tax affairs today will be wondering where else the government might suddenly change the rules, start applying new laws to years past and demand big pay-outs.”
While the crackdown on tax avoidance is welcome, the loan charge is an iron-fisted way of going about it.