IR35 and loan charge may lead to serious consequences

A recent debate in the House of Commons mentioned IR35 and the 2019 Loan Charge, and the serious impact it will have on those affected

There was much debate in the House of Commons on the 20th November regarding the 2019 charge on tax avoidance related loans. IR35 was also mentioned as another example of what was argued by many MPs as an unfair tax on its constituents, and the severe consequences of the effects of such legislation.

The 2019 Loan Charge has been introduced by HMRC to recover unpaid taxes by people who have used disguised remuneration schemes involving loans since 6th April 1999 and will be introduced in April 2019. It is a retrospective tax that will treat all loans received from “disguised remuneration” as taxable income, and as if all of that income had been earned in the 2018/19 tax year meaning that the income will also be subject to an additional PAYE tax charge.

It is estimated that approximately 50,000 people will be affected by the legislation, and will be required to pay up by 31st January 2020. HMRC recently invited users of disguised remuneration schemes to notify of their interest to settle with HMRC (by 30th September 2018), and settling before 5th April 2019 could mean avoiding application of the 2019 tax charge.

The Chancellor wrote of the change in legislation that;

“It is not normal, or indeed reasonable, to be paid in loans that are not repaid in practice. It is not fair to the vast majority of taxpayers who pay their taxes in full and on time for anyone to benefit from contrived avoidance of this sort and that is why this government has legislated the charge on DR loans.”

Whilst it is clear from the debate that many agree with the principle of collecting the unpaid tax from users of such schemes, it is also clear that many do not agree with the way in which HMRC have gone about it.

Steven Baker Conservative MP for Wycombe stated;

“The Loan Charge Action Group says that the human impact of receiving a bill for up to 10 years’ worth of tax will have a catastrophic effect on individuals and their families. On whom among us would it not have a catastrophic effect? It goes on to say that we are looking at thousands of bankruptcies, family break-ups and suicide attempts, as well as mental illness, unemployment, loss of abode and more. That is a catalogue of human suffering and misery.”

This is despite the fact that HMRC do not expect the change in legislation to have an impact on “family formation, stability or breakdown.”

One of the many reasons the Loan Charge has come under fire is because it is retroactive, and many believe this is unfair. HMRC have always been notified of tax avoidance schemes under the ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) rules. Once a scheme had been registered with HMRC, a ‘DOTAS’ number would be provided, and it appears that in many cases, this was taken to be approval by HMRC of the scheme. Jim Fitzpatrick Labour MP, Poplar and Limehouse said;

“Why did it take HMRC 20 years to take official action? Why did HMRC not email or write to loan users over the past 20 years, to ask them to come out of these schemes and the associated risks, when it had the relevant information on the yearly individual self-assessment tax returns?...

“Why cannot HMRC just admit that it did not perform due diligence on the loan schemes? Why, when public sector contractors were asked to move into IR35 in 2018 so that they could pay the right amount of tax, did they not get retroactive tax to pay?... Apart from going bankrupt or committing suicide, how does HMRC expect most individuals to be able to repay such sums at short notice?”

Edward Davey, Liberal Democrat Spokesperson (Home Affairs), further summed up the general feeling of many MPs, who had received many complaints from their constituents regarding the 2019 Loan Charge;

“I have never seen people so distressed and distraught by one particular measure, which appears to target pain on just a few people... Everyone in this House is clearly against tax scams. We want to close them down, but… HMRC appeared to be happy. It was notified of the tax schemes and did nothing. Yes, let us crack down on tax avoidance, but let us not go after victims, the people simply trying to earn a living for them and their families.”

“...in those early days of my parliamentary career, I had the pleasure of sitting on nine consecutive Finance Bills that dealt with the early history of IR35. We had huge arguments then that that was wrong….HMRC has got to learn from history. It appears to me to be acting vindictively because it did not get its way a few years ago on IR35…”

The use of such schemes became much more prevalent with the introduction of IR35, which was commented upon by Janet Daby Labour MP for Lewisham East who said;

“…third-party scheme providers began to offer a service whereby contractors became employees of a third-party company, which was then engaged by the agency or client company. Remuneration was paid in the form of loans, which were often made by an offshore third party. Those arrangements were marketed as HMRC-compliant and seemed to offer the certainty that many were looking for….”

In concluding the debate, Steven Baker, Conservative MP for Wycombe, shared the sentiments of many other MPs by conceding;

“…sometimes we have to say, “While we don’t stand on their side and we accept that it was not Parliament’s intent, we respect that there is a price to be paid for upholding the rule of law so that in the end we can preserve human liberty and justice.”

The fact is that HMRC were notified of tax avoidance schemes and at the time they were set up and did not take any action against them. To take action now, so long after such schemes have been in place and after so much ‘liability’ has built up is unfair. What is interesting is that much of this could very well be a product of the IR35 legislation, which, since its inception has never worked which is why over the years there have been so many tweaks to try and clean up the mess it has left behind.

We now have the off-payroll rules within the public sector extending to the private sector from April 2020. We’ve heard tales of misery with the introduction of the IR35 reform in the public sector, and such tales are likely to continue. No-one would argue that those avoiding tax should be held accountable, but HMRC should go about collecting any unpaid tax in a ‘fair’ manner, which should avoid the potential to ruin people’s lives.