A retrospective tax on self-employed individuals who made use of alternative remuneration schemes will now be reviewed by the Treasury, following a key amendment to incoming legislation.
Liberal Democrat MP Ed Davey secured an amendment to the Loan Charge in the government’s latest finance bill, requiring the chancellor to review the effects of the legislation on many contractors.
The decision followed an apparent last-ditch attempt to prevent the amendment, in which financial secretary to the Treasury, Mel Stride, circulated a letter to all MPs on 21 December 2018 which contained “misleading” comments about the Loan Charge, according to the Federation of Small Businesses (FSB).
The Loan Charge
The Loan Charge, introduced in the Finance Act 2017 to combat “disguised remuneration” schemes, was cited in a recent parliamentary report as leaving low-paid workers in unpayable debt. The remuneration schemes, a form of tax avoidance heavily marketed to the self-employed, saw employers pay substantial amounts to an employee benefit trust, and paid to the employee by way of a loan to avoid National Insurance Contributions (NICs).
Directed by the government, HMRC has been charging income tax on the value of all loans made under these schemes. The House of Lords Economic Affairs Committee produced evidence that suggested loan charges were “disproportionate and unfair”.
An excerpt from Stride’s letter to MPs read
“The Loan Charge legislation itself is not retrospective. The schemes never worked under the law that existed at the time they were used. A number of court successes, including in the Supreme Court, support the view that the payments to the individuals were always taxable as income. Even without the Loan Charge, HMRC would be legally obliged to pursue the tax due.”
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Responding to confirmation that the Loan Charge will be reviewed, FSB chairman Mike Cherry, said the “unacceptable” tax was inherently unfair.
“The loan charge is an unfair, retrospective tax grab on self-employed individuals who were acting within the law when they made use of alternative remuneration schemes many years ago. It’s a relief to see the government finally recognise this fact.
“In a lot of cases, these individuals are not financial experts earning huge sums – many were acting on the advice of big employers or professional third parties. They are people who could lose everything if the loan charge is enforced.
“Retrospective taxation is unacceptable. It’s not fair to change the rule book and throw it at those who played fairly by the old rules in the past.”
Meanwhile, ContractorCalculator founder Dave Chaplin emphasised the apparent misrepresentation in Stride’s letter to MPs.
“I am pleased that Ed Davey MP has succeeded in getting this amendment,” Chaplin said.
“Mel Stride’s letter that he circulated was a shocking misrepresentation of the truth. We’re now very familiar with government’s false claim that the Loan Charge isn’t a retrospective tax. But asserting that HMRC would be obliged to pursue the tax regardless implies that the concept of enquiry windows no longer applies to the taxman. They simply have no powers to collect taxes from such a long time ago, particularly from schemes that were legal at the time.”
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