Powers to tackle tax avoidance have tipped too far in favour of HMRC and are undermining the British justice system, a House of Lords report has warned.
According to the House of Lords Economic Affairs Committee, HMRC has been granted disproportionate powers without effective safeguards for the taxpayer.
The report claimed that high penalties, designed to deter individuals from appealing decisions, were a tax on justice.
The government was also accused of failing to identify “the full range of behaviours and circumstances” of tax avoidance. The report called for greater distinction between sophisticated, high-income individuals and “uninformed or naïve decisions” made by unrepresented taxpayers.
Small businesses in the firing line
HMRC was recently accused of “aggressively” seizing more assets than ever from small businesses struggling to pay tax bills in cash.
There has been a 45% jump in the number of businesses having their assets seized in the last 12 months – from 1,953 to 2,833.
Rules allow HMRC to even seize business critical assets such as IT systems or machinery, the removal of which could lead to the closure of a business.
A study found that £69.7m was raised by HMRC from the sale of the assets it seized last year, up 67% from £41.6m in the previous year.
Committee chair, Lord Forsyth of Drumlean, said HMRC was right to challenge tax evasion and aggressive tax avoidance. However, he called for a “careful balance” between clamping down and treating taxpayers “fairly”.
“Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer should expect,” he added.
2019 loan charge
The 2019 loan charge, introduced in the Finance Act 2017 to combat “disguised remuneration” schemes, were cited by the report as leaving low-paid workers in unpayable debt. The 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 committee cited evidence that suggested loan charges were “disproportionate and unfair”.
The evidence reported a case of a public sector contractor made redundant by a local council. “It had a farewell party on the Friday, and on the Monday it said ‘If you join this agency and use the scheme, we will re-engage you as a contractor.’
“She was re-engaged as a contractor for five years but at the end of the five years, the council told her it would re-employ her as an employee, which it did.
“She was unaware of what was going on. She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it.”
In its recommendations, the report said HMRC should review all loan charge cases where the only remaining consideration was the individual’s ability to pay, as well as establishing a dedicated helpline to give advice and support to those affected by the loan charge.
The committee said action should take place “well in advance” of the loan charge coming into effect in April 2019.
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Andy Chamberlain, IPSE’s deputy director of policy, said HMRC’s “aggressive approach” to the 2019 loan charge caused financial ruin and emotional distress for thousands of taxpayers.
“The report’s description of HMRC’s approach as ‘aggressive’, ‘unfair’, ‘devastating’ and a ‘tax on justice’ is a damning indictment of a retrospective taxation which has left many with substantial repayment demands. Indeed, at a recent Westminster Hall Debate, a group of cross-party MPs called on the government to stop applying the tax retrospectively.
“IPSE recently wrote to the chancellor to urge the government against this most aggressive approach to tax compliance. With IR35 reforms already ravaging the self-employed, HMRC must find a better balance and treat taxpayers fairly.
“It is right to tackle tax evasion and tax avoidance but its approach – which HMRC itself has conceded will cause some individuals to ‘become insolvent’ – is having a chilling effect on our flexible labour market.”
In response to the committee’s report, a government spokesperson said HMRC powers were a fundamental tool in the fight against tax avoidance and evasion.
“Parliament has given HMRC powers it needs to tackle businesses and individuals who do not pay their fair share, and it uses them responsibly and subject to appropriate checks and balances.
“On the loan charge in particular, it is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.”
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