A cross-party group of MPs has urged the Minister responsible for HMRC to suspend its controversial loan charge with immediate effect following an interrupted House of Commons debate. This follows the publication of an excoriating report into the Revenue’s conduct in enforcing this legislation.

On Thursday, MPs from both sides of the house lined up to support a motion tabled by Conservative backbencher Ross Thomson which demanded a six-month delay to the policy and an independent inquiry into the charge.

The debate was curtailed due to a burst water pipe in the House of Commons causing a leak in the public gallery, with no resolution reached. The session is due to resume on 11 April, but as the tax is due to come into effect from today (5 April) members of the All-Party Parliamentary Loan Charge Group (Loan Charge APPG) petitioned financial secretary to the Treasury Mel Stride to seek an urgent suspension of the law.

Senior MPs from both sides of the House stood up to criticise the loan charge, with former Brexit Secretary David Davis describing it as a tax policy that is “destroying families, homes, mental health and even lives."

Former Treasury minister Justine Greening stated that HMRC had “simply got it wrong” in its approach to the loan charge, describing the tax authority’s approach as “punitive rather than proportionate.”

‘An organisation out of control’

The House of Commons debate followed the publication of a report from the Loan Charge APPG examining the circumstances surrounding the loan charge and HMRC’s conduct with regards to it.

The report received more than 900 submissions from those affected, and the main conclusions from it are as follows:

There is a clear risk to the mental welfare of people facing the loan charge, including known suicide risks and a number of suicides linked to the charge.

There will be many bankruptcies as a result of the loan charge.

The original impact assessment published by the Treasury was flawed and inadequate, to the point of being negligent.

The ‘disguised remuneration’ arrangements were not entered as “aggressive tax avoidance” and were often a condition of employment, especially in the public sector.

The Loan Charge is retrospective, overrides taxpayer protections and undermines the rule of law.

The real reason for the introduction of the loan charge was to bypass the normal legal processes and to allow HMRC to collect tax where they were ‘out of time’ under existing legislation.

There has been a cynical campaign of misinformation waged by HMRC and the Treasury.

The inquiry recommended a number of action points including an immediate six-month suspension of the charge and an independent review led by an experienced tax judge to assess its impact and legal justification.

The report also called for a wider investigation into the conduct of HMRC with regard to the Loan Charge and an independent assessment of HMRC’s use of behavioural psychology and behavioural insights, “the knowing use of which should be suspended in the light of the suicide risk and the known suicides of individuals facing the loan charge”.

A section marked ‘HMRC conduct overall’ stated: “HMRC’s conduct with regard to the loan charge indicates that it is an organisation out of control, urgently needing better and proper scrutiny and genuine accountability.”

In an open letter to HMRC’s chief executive Jonathan Thompson accompanying the report, MPs expressed “serious concerns” that both HMRC and Treasury Ministers are “consistently issuing misleading information in documents, letters and press statements regarding the loan charge”.

Reacting to the debate and report, a Treasury spokesperson told AccountingWEB: "As announced at Budget 2016 and in accordance with the legislation, the loan charge takes effect from April 5. Anyone who contacts HMRC by midnight April 5 with the genuine intention to settle their tax affairs and provides the required information will almost certainly end up paying less.

"We remain committed to ensuring that people impacted by the loan charge receive the support they need, and that individual cases are treated sympathetically in the light of individual circumstances."

Is it too late?

The loan charge legislation was passed in Finance (no.2) Act 2017 and is due to come into force today (5 April 2019). However, with pressure mounting on the government over its impact and the behaviour of its departments in enforcing the legislation, calls for a delay have reached a crescendo.

However, speaking on AccountingWEB’s No Accounting for Taste podcast, tax expert Rebecca Cave stated that it may be too late for loan charge campaigners.

“This loan charge was put into law in the 2017 Finance Act that was passed directly after the election of that year. There was very little scrutiny. There were two finance bills that year. One before the election, which was shortened because we had a snap election … and the rest of the Finance Bill was then brought back. Because we had a whole new group of MPs, and Mel Stride was suddenly new into his post in charge of HMRC, this legislation never really got properly reviewed by MPs and it just got passed in the Finance Act so it’s there, it’s law, and it will take law to unwind it.”

Due to Brexit currently occupying a large proportion of parliament’s debating time, Cave said she doubted there would be “any time at all” to pass anything to stop the loan charge.

What is the loan charge and why has it hit the headlines now?

The loan charge was created to collect tax in respect of the numerous loan-instead-of-salary schemes (known as disguised remuneration) that sprung up in the wake of the government’s clampdown on contractors in the early 2000s.

Workers were paid via loans to avoid tax and NI contributions, and although they paid tax on the benefit of having an interest-free loan, in many cases they did not expect to ever repay the loans. HMRC claims that such arrangements could never avoid tax, although specific rules against disguised remuneration did not come into effect until December 2010.

The Revenue’s solution to collect tax on the huge number of disguised remuneration loans in existence was the loan charge, which adds together all outstanding loans, over the course of up to 20 years, and taxes them as income in one year. Those hit by the loan charge originally had to pay by the end of January 2020, but HMRC claims it has a range of solutions for those affected to settle and spread the cost with them.

Around 50,000 individuals with a range of backgrounds will be affected by the loan charge, and accounting institutes and bodies, along with MPs and peers, have condemned the government for failing to properly assess its impact.

It has long been feared that the loan charge could lead to mass bankruptcies, and there have been reports of suicides directly linked to the charge.

A separate House of Lords inquiry conducted last year labelled the charge “unfair” and “pernicious”, and found that those affected included low-paid NHS and social workers who claim to have unaware they were even part of such schemes, having been forced to operate through umbrella companies by their employment agencies.

The charge has also come under fire for its retrospective nature, although the Treasury has taken the view that it is not technically retrospective.

HMRC was contacted for comment on this story. This story was amended 5 April to add a quote from the Treasury.