Loan charge not to apply to loans or quasi-loans made before 9 December 2010

Finance Bill – in a Public Bill Committee am 2:00 pm ar 4 Mehefin 2020.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

This is the first of seven clauses— clauses 14 to 20—that bear on the loan charge. I do not need to tell any Member of the House of Commons that the loan charge has elicited a degree of controversy in some quarters. It might be helpful if I remind the Committee of the nature of the loan charge and what it actually is.

The clause amends the date from which disguised remuneration loans are subject to the loan charge specifically from 6 April 1999 to 9 December 2010. That has the effect of removing loans entered into before 9 December 2010 from the scope of the loan charge.

Disguised remuneration, as it is described, is a form of abusive tax avoidance, where individuals seek to avoid paying income tax and national insurance contributions by receiving payment through a loan that is itself never repaid—a remuneration practice that costs the Exchequer hundreds of millions of pounds a year. In many cases, the loans are paid over and above a smaller payment that goes through the pay-as-you-earn system, and the payment is made, perhaps on a monthly basis, in the form of an accumulation of a loan. The loan never, in my experience, has interest charged to it. The expectation is that it will never be repaid. It is typically administered through an offshore vehicle, which highlights how contrived this approach is to the avoidance of tax.

The loan charge was designed to combat that form of tax avoidance. It was introduced as a new measure in 2017. In September 2019, the Chancellor commissioned Sir Amyas Morse to conduct an independent review into whether the loan charge was an appropriate policy response to the use of such disguised remuneration schemes. Sir Amyas had full control over the review’s management and recommendations. He received evidence from a very wide range of individuals affected. He spoke to interest groups, Members of Parliament, tax specialists, legal experts and many other stakeholders.

Sir Amyas’s report, which is 76 pages in length, is a thorough and exacting review document, which painstakingly worked through the issues and recommended notable changes to the policy, including substantial carve-outs regarding who was affected. The Government accepted all but one of Sir Amyas’s recommendations, and more than 30,000 people will benefit from the changes. This clause, along with others in the Bill, make changes to bring about those recommendations in so far as they require statutory change. Work is under way by the Government to implement the recommendations that do not require legislation.

Sir Amyas’s careful and considered report examined the question of the date from which the loan charge should apply. He concluded that the law regarding the tax treatment of disguised remuneration loan schemes was clear from 9 December 2010, when draft legislation was published setting out that income provided through schemes using third parties, such as loan schemes, would be subject to income tax and national insurance.

Clause 14 amends the date from which disguised remuneration loans can be subject to the loan charge and removes those loans entered into before 9 December 2010 from the scope of the loan charge. The clause, along with clauses 15 to 20, legislates for several recommendations from the independent review on the loan charge. It takes about 11,000 people out of the loan charge entirely, and it reduces the tax charge of around 21,000 individuals. I therefore commend the clause to the Committee.

Photo of Wes Streeting Wes Streeting Shadow Exchequer Secretary (Treasury) 2:15, 4 Mehefin 2020

It is a pleasure to serve under your chairmanship, Mr Rosindell, not least as a parliamentary neighbour.

As the Financial Secretary has outlined, this is the first of a number of clauses related to one of the most politically contentious issues—certainly across the House—in the Bill. By way of introduction, it would be helpful if I set out the Labour party’s position on the loan charge overall and on how we intend to approach the clauses and amendments this afternoon.

It will come as no surprise to any Member of this House that the Labour party takes a dim view of tax avoidance. We believe that tax is the price we pay for a civilised society, that it is important that all of us—individuals, organisations and businesses—pay our fair share of tax, and that when people contrive to avoid their tax, they rob and short-change all of us of the revenues needed for the state to do the essential things it needs to do, whether that is keeping our country and our borders safe or providing the public services on which all of us rely.

Turning to the loan charge specifically, we have not opposed the Government’s changes, as we recognise their general approach to clamping down on tax avoidance schemes in this way. What I want to do with this clause and those we will discuss later this afternoon is to give an airing to many of the detailed and contentious issues that have been raised by Members of all parties right across the House.

The all-party loan charge group has more than 200 members, drawn from parties right across the Chamber. When we come to the later stages of the Bill on Floor of the House, Members will no doubt want to put forward amendments and push the Government to go further in some respects. It is therefore important in our proceedings here in Committee that we delve as deeply as possible into these issues, so that all Members can understand the Government’s thinking and the way in which policy evolved and then consider whether it would be appropriate to bring forward further changes and what those changes might be.

Let me turn now to clause 14. As we have heard from the Financial Secretary, these changes are made in response to Sir Amyas Morse’s independent review into the design and implementation of the loan charge. It was commissioned by the Government, but it is fair to say on behalf of Members across the House not only that the Government appreciate the work Sir Amyas Morse did—it is a thorough piece of work—but that we thank him too. He has done a great service to Parliament and to the wider public debate.

The Financial Secretary mentioned that the Government have accepted all but one of the recommendations from the review and, at some point this afternoon, he should elaborate further on the particular recommendation that the Government have chosen not to accept and implement and explain why.

Here, of course, we are looking specifically at the amendment to the date from which disguised remuneration loans are taxed under the loan charge from 6 April 1999 to 9 December 2010. The 2019 loan charge justified looking back to 1999 by saying that the Government and HMRC had always said that the schemes did not work, but Sir Amyas found that this was not the case before the 2011 legislation. Approximately 40% of the pre-2011 tax years in scope of the loan charge did not even have an investigation into them opened up by HMRC. Even if HMRC had made its position clearer, taxpayers are entitled to rely on the law as interpreted by the courts, and, clearly, legal proceedings have had a bearing on the Government’s considerations.

We will return to HMRC across the afternoon, but this is probably an appropriate time to say two things in relation to it. First, I place on record my thanks and the thanks of the official Opposition to all the staff and leadership at HMRC for the difficult work that they are doing overall at the moment on all our behalves, in the extraordinary circumstances we are all living through. Secondly, let us not forget that HMRC also has a slightly technical and complicated piece of work going on in the background, by which I mean the implementation of Brexit. In normal times, the demands placed on the Revenue are significant, but these are extraordinary times with unique challenges. I want to make that really clear up front, not least because I am about to criticise HMRC.

I must say, having served on the Treasury Committee in the previous Parliament and in the 2015 Parliament, that my discussions with HMRC in relation to the loan charge did not fill me with a great deal of confidence about the way in which it approached this issue over a great many years.

On the controversy generated around the issue of retrospection, where charges are being applied retrospectively, and why that is a really difficult principle and challenge for Members to accept, we in this House, whichever party we represent, do not like the idea of retrospective legislation. We do not like the idea that decisions—certainly levies or charges—apply retrospectively.

HMRC would have given the Government a much easier ride if it had done its job more thoroughly in terms of looking closely at individuals’ tax affairs over many years. One of the things that shocked me most, both as a constituency MP looking at my loan charge casework and as a member of the Treasury Committee, was that those individuals were filing their tax returns over many years. HMRC has said for a great many years that it has considered disguised remuneration schemes such as those covered by the loan charge, and specifically those covered by the loan charge, to be unlawful and contrived schemes, yet, in so many cases, no enforcement action was taken. People were happily sending in their tax return at the end of the tax year, not hearing anything further and assuming that that was good news: “If HMRC has looked at it and considered the tax return, then it must be fine.” Clearly, that is not the case.

I really hope that Ministers have properly dragged officials over the coals—not literally, of course, but metaphorically. In terms of the political controversy, the pain of a lot of victims—in a lot of cases there are victims of the loan charge, as well as people who sought to ruthlessly exploit it, not least the promoters, and there are a lot of people in our constituency casework who I would consider to be victims of the loan charge—would not have taken place if the tax inspectors had done their job more thoroughly and picked up on this activity earlier.

Constituents at my advice surgeries on Friday afternoons, many of whom have been in serious financial distress, have told a story familiar to Members across the House: “My circumstances were unusual. I am not a tax expert, but I took professional tax advice and made arrangements thinking that they were within the law.” The point is that, had HMRC picked up on some of these issues earlier, some of those constituents would have corrected their tax affairs much earlier, they would not have been in this position, and this debate on clause 14—on when the loan charge should take effect—would have been rather more redundant. None the less, we are in the position this afternoon where the date has been settled on as a result of the work not just of the courts, but of Sir Amyas himself in the report. We therefore support these clauses.

I would like the Minister, when he replies on this clause, to touch on a few issues. First, I would like him to say something about the discrepancy between the action being taken on taxpayers and on enablers of tax avoidance. That has been another significant controversy. It is not just the case that people have been scouring the internet in search of ways to minimise their tax liabilities. A number of promoters have been engaged in the promotion of aggressive tax avoidance schemes and have put their clients in an invidious position. I am sure I speak for people across the House in saying that we need tougher action against those promoters, who do a real disservice to the wider profession of financial service advisers. I do not believe, despite the reassurances we have been given by Ministers during successive rounds of parliamentary debate on this issue, or by HMRC in hearings of the Treasury Committee, that the action matches the rhetoric.

I would like the Minister to say more about what action is being taken against the promoters of these schemes.

As the Minister will be aware, the all-party parliamentary group is dissatisfied with the date set out in the Bill. Its report on Sir Amyas’s report picked up on some of the expert views that Sir Amyas drew on in setting out his conclusions. As set out on page 28 of the APPG’s “Report on the Morse Review into the Loan Charge” of March 2020, a number of experts were consulted during the review and asked the simple question of whether they agreed or disagreed with the statement that

“schemes entered into on or after 9th December 2010 would clearly generate an income tax consequence.”

Of the 14 or so experts listed on page 30 of the APPG report, a number did not comment, but—as the Minister and his officials will see when they review this, if they have not already done so—a number of those tax advisers disagreed with the statement.

The APPG cites that point in support of its view that the retrospective application of the loan charge is still going back too far. Given we are likely to return to this issue at later stages of the Bill, it would be helpful for all Members of the House—those who are APPG members and those who are not, but who may at some point be asked to express their view in a Division of the House—if the Minister responded to the point about how the date was arrived at, and whether there was a clear and consistent view or whether some of the arguments about retrospection are either highly relevant or redundant.

As the Minister explained in his introductory remarks, clause 14 enacts a recommendation of Sir Amyas’s report that rights a wrong. The Opposition will certainly not oppose the Government doing the right thing after a thorough review of the evidence and the judgments of the courts.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

It is a pleasure to see you in the Chair, Mr Rosindell. I agree with much of what has been said by the hon. Member for Ilford North. The SNP believe, fundamentally, that people should pay the tax that they owe, but it is clear from the evidence put to the all-party parliamentary group and in various reports that HMRC’s implementation has not involved appropriate communication with affected individuals. We believe that a review is in order to ensure that nobody is made homeless or bankrupt as a result of the loan charge.

I would also ask what consideration the Government have given to people’s ability to pay due to coronavirus, which may change people’s circumstances and their ability to repay. What consideration has HMRC given to those circumstances and how they might affect somebody’s ability to pay? It certainly will be beneficial to HMRC to get the money at some point, but if there is a strict time limit, within which people just cannot pay because they do not have the money and need to put food on the table, that needs to be taken into consideration.

It is something of a scandal that tax professionals advised clients to use these loopholes. There needs to be a further review into the advice given by those professionals and some comeback on the promoters of the schemes, who have clearly encouraged people to take them up. Individuals may have gone into them with their eyes open or their eyes closed, but the promoters of the schemes almost certainly knew what they were doing, what they were advising and what their intention was. We should go after those people aggressively, to ensure that they are not only held accountable for what they have done in the past, but prevented and disincentivised from coming up with similar loophole schemes in future. The very nature of our complex tax system means that the people out there who can benefit from those loopholes will always seek to find them. If we can send a clear message that that is unacceptable and there are consequences for doing so, that is worth considering.

My hon. Friend Drew Hendry tabled early-day motion 296 welcoming the publication of Sir Amyas Morse’s loan charge review, the UK Government’s amendments to the relevant legislation through the Finance Bill such that loans made before 2010 will no longer be subject to the loan charge, and delaying the self-assessment deadline until 30 September 2020. The initial analysis suggests that more than 30,000 individuals will benefit from these and related measures, but we still believe that a pause in the policy is necessary before continuing to provide a report, assuring Members that HMRC is working constructively with those seeking a reasonable repayment plan—one that recoups the unpaid tax while avoiding the unacceptable risks of bankruptcy and homelessness. If HMRC is not in a position to deliver that, an independent arbitration mechanism should be used to achieve it.

Those reasonable arrangements take into account what campaign groups have highlighted about the impact of this on mental health. There is significant evidence to suggest that the mental health of people involved in this has been seriously impacted. We should not diminish the impact on individuals and families. People have lost their lives through this.

The Scottish National party supported new clause 26 to the previous Finance Bill, which would have reviewed unrelated tax code changes and compared them with those related to the loan charge. Despite the amendment not seeking to change or review the loan charge itself, it allowed us to express our concerns, alongside other parties, and we were happy that the UK Government conceded on that provision, in order to avoid yet another Commons defeat at that time.

My hon. Friend Kirsty Blackman wrote to the then Treasury Minister, Mel Stride, seeking assurances that evidence would be provided to parliamentary hearings. This goes to my earlier point that we need evidence, and that we need to be able to interrogate and ask questions of that evidence. Somebody sending a briefing is useful, but being able to have some back and forth with people who know more about this than we perhaps do would allow us to make the right decisions. Evidence from the likes of the all-party parliamentary loan charge group or other experts in the field might have been incredibly useful to the Committee.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury 2:30, 4 Mehefin 2020

I thank the hon. Members for Ilford North and for Glasgow Central for their speeches. The hon. Member for Ilford North started by setting out the principles of, as it were, a Labour approach to tax avoidance and evasion, and described how, in the Labour view of things, tax avoiders were in fact guilty of robbery, which I thought was a very big claim. Robbery is not a word I would ever use in this context, but there is a serious problem of avoidance and evasion, and—as I will come on to, and as the hon. Member for Glasgow Central mentioned—there is a serious problem with the promotion or enabling of tax avoidance and evasion schemes.

I thank the hon. Member for Ilford North for his comments in support of Revenue and Customs, with which I fully concur, as I am sure does everyone in this Committee and the more than 10 million people who now have their livelihoods or jobs supported by schemes that HMRC has put in place in a very short period. He also rightly praised Sir Amyas Morse, saying that the Labour party accepted the Morse review as a piece of work. He is absolutely right about that. Sir Amyas, on his retirement, elicited unimpeachable measures of approval and statements of support from across the House.

Where I think the hon. Gentleman is wrong is on the question of retrospection. He will be aware that the loan charge is a new charge and is therefore not retrospective legislation. The common understanding of retrospection is that it somehow changes the law as it was at the time when people operated, but the whole point is that, as Sir Amyas found, from at least 9 December 2009, the law was as indicated. One can dispute the period before that, and HMRC retains the ability in the case of certain years to pursue people for tax due before that period. But the review made clear—this is very important—that Sir Amyas Morse accepted the principle of the loan charge. The review made significant changes to the application of a principle that Sir Amyas accepted.

We are bound to return to these themes later on in our discussions, but it is worth touching on them now. The hon. Member for Ilford North raised the provision that the Government did not accept in the Morse review, which was the idea that arrears in tax should be written off after 10 years. The reasons that the Government did not accept that were twofold. The first was that it would have had the effect of treating people who had engaged in these disguised remuneration schemes and benefited from this approach more favourably than other people who might be in arrears in tax with the Revenue, which the Government felt was not appropriate.

The second reason was that the Revenue and Customs has highly effective time-to-pay arrangements, which have been further extended in the case of the loan charge, to allow people on lower incomes an additional seven years of time to pay as a minimum. Those arrangements are very flexibly and intelligently administered by the Revenue and Customs, and they are already being utilised by people in significant numbers before the coronavirus pandemic and undoubtedly as a result of it. There is no need for a statutory change, and such a change would have had the effect of treating scheme users more favourably than others.

The hon. Member for Ilford North raised the all-party parliamentary loan charge group and the Loan Charge Action Group, which has been very vigorous on social media and elsewhere. Colleagues’ input is always valuable, but we should take this one with a little pinch of salt, because it is the product of an enormous amount of concerted political lobbying of an extremely intense kind on Members who are members of that group. In that sense, it does not exercise what I would consider the kind of independent judgment that we would want an all-party parliamentary group to exercise.

The contrast is with the Morse review itself, which was an admirably independent-minded piece of work. It by no means took a Government line in any of its recommendations and showed itself all the more valuable for that. It was itself a comprehensive response to the concerns that had been raised. If people have concerns about, for example, the choice that Sir Amyas made to locate the point of cut-off for the application of the loan charge to 9 December 2009, they have merely to read the relevant chapter, which is an extremely thorough and careful reconstruction of the legal process and the enforcement process up to and after that date.

I am struck by the fact that many of the themes that came through in the Morse review were picked up by a rather important recent case which related to the loan charge—Zeeman and Murphy v. HMRC—in which the judge said:

“This is not a tax on fictitious income or benefits, but on genuine remuneration received for work done or services rendered, paid in the form of a loan. The recipients of the money have had the advantage of its use for some time…over many years.”

That is true. The judge went on to say that

“it was well within the generous margin of appreciation for Parliament to decide that it would tackle the matter in the way that it did, and impose a present tax liability in respect of money whose use, tax-free, had been enjoyed by the recipient over a number of years.”

I do not want to comment on that, because I do not think that proceedings in a law court should be commented on by Members of Parliament, but I draw it to the Committee’s attention.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.