Legislation to remedy HMRC’s inaction seems to us both aggressive and retroactive
We are very concerned about HMRC’s proposals to tackle disguised remuneration. They contravene generally accepted notions of fairness, break the constitutional convention against retrospective legislation and impose tax charges in cases where taxpayers already had legal certainty that no tax was due.
ICAEW Tax Faculty expressed these concerns in its response ICAEW REP 150/16 to the consultation document Tackling disguised remuneration published by HMRC on 10 August 2016.
HMRC proposes to introduce a new ‘loan charge’ when a loan has been made to an employee or director, certain ‘gateway’ conditions are met on 5 April 2019, the loan was made on or after 6 April 1999, and the loan, or part of it, was outstanding at 5 April 2019. The gateway conditions to be met are the existing ones in Part 7A ITEPA 2003 plus some new ones, to be called the close companies gateway, described in the consultation document. It is intended that the loan charge will subject existing loans to tax under Part 7A ITEPA 2003. Parallel NIC provisions will be introduced.
The consultation document says that ‘[disguised remuneration (DR)] schemes usually involve an individual’s income being funnelled through a third party, with the money often then being paid to the individual as a “loan” that is never repaid.’ Examples of third parties include an employee benefit trust (EBT) or an employer funded retirement benefit scheme (EFURBS).
We consider that HMRC is creating a retrospective tax liability where none currently exists. HMRC has been aware of loans to employees (referred to in the consultation document as DR schemes) since at least 1999 and failed to open inquiries or raise assessments before the expiry of statutory deadlines. Using retrospective legislation to remedy failures in HMRC’s procedures is unreasonable.
HMRC can currently raise assessments going back 20 years where there is an enquiry into tax suspected to have been evaded or where there have been deliberate misstatements in a return. However, the proposals target taxpayers who have not done anything that would under current rules leave themselves open to a 20 year assessing window. HMRC can currently assess six years in cases of careless (as opposed to deliberate) error. Few, if any, of those taxpayers involved in DR schemes will have filed inaccurate returns, either carelessly or deliberately, so HMRC should arguably be limited to assessing events only in the last four years.
The proposed legislation will extend the assessing window in 2019 to 20 years including years that are 'closed'. To introduce legislation which affects transactions which were entered into up to 17 years ago (measured from the current year) where HMRC has taken no action despite knowledge of the alleged avoidance is likely to lay the proposed legislation open to challenges under the Human Rights Act.
It appears that the consultation does not recognise the fact explicitly that some taxpayers who took the option of not receiving a corporation tax deduction in the recent EFRBS Resolution Opportunity could also be subject to the loan charge in full. We have requested confirmation that there will be no income tax or NIC charge in these cases, failing which, confirmation that credit is given for any corporation tax paid under the resolution opportunity against the income tax and NIC due under any subsequent loan charge.
On the international scene these proposals when considered in the light of other recent and proposed changes to employer taxes and payroll, benefits-in-kind and expenses reporting processes are making the UK appear a more ‘difficult’ country in which to locate staff, which may not be desirable in today’s fragile economic climate.
Thanks ICAEW for saying it like it is. Though HMRC denies it, the primary targets of this latest retrospective stunt seem to be freelancers having used "contractor schemes" that, to their frustration, HMRC has been unable to secure a win in court against (never mind that many were lured into these "schemes" to escape the uncertainty introduced by another failed legislation: IR35)
So after bending the purpose of DOTAS, carpet-bombing individual with unlawful APNs, HMRC now wants to go for the kill and cover-up once and for all the inconvenient question of their own inaction of the past 10+ years. Instant money grab, and instant absolution for them. All a little bit too much.
I would sincerely hope that this will be halted by the House of Lords for all the reasons you have explained in the article. Fair enough if the rules are to be amended going forwards and possibly even from a date now with a transition period up to the mentioned date of April 2019, but as you say currently it appears to be another attempt at retrospective taxation by HMRC. It has always been bad enough needing a crystal ball to predict what they might do with future taxation but I fear we now need a time machine as well!