personal finance

HMRC’s loan charge assault runs contrary to legal safeguards


So far as principles are concerned, few people will object to the notion that taxpayers should pay the right amount of tax.

But it is inevitable that not everyone will always do so. Some will pay too little and some too much. What should be done and what policy considerations are at play in such cases? It is a question that has been brought into focus by the recent controversy over the government’s so-called “loan charge”, its measure to claw back tax “owed” under disputed loan schemes.

Mrs Justice Whipple remarked in 2015: “HM Revenue & Customs’ primary duty . . . to collect tax [is not] a trump card which prevails over all other considerations.” Instead, it is “a broad duty, exercised by means of a wide managerial discretion, within which is embedded the obligation to treat taxpayers fairly”.

This nuanced approach is reflected in the fact that the tax code contains a series of statutory safeguards to ensure a fair balance between HMRC’s duties that it carries out on behalf of the general body of taxpayers and the rights of individual taxpayers.

At the heart of these safeguards sit a number of time limits. For example, a taxpayer seeking a repayment of overpaid income tax must claim the repayment within four years after the end of the relevant tax year. But even that is not the end of the story as the legislation includes a list of situations in which a repayment may not be made — even if it means that the taxpayer is left out of pocket.

Equally, HMRC is bound by strict time limits. These were tightened in the mid-1990s when self-assessment was introduced as part of a package that balanced the additional obligations on taxpayers under the self-assessment code with taxpayers’ need for finality.

Inquiries into tax returns must generally be opened within one year of the return being submitted. However, HMRC has retained a residual power to make “discovery assessments” in cases where they failed to address an apparent underpayment in the course of an inquiry.

But even that power is firmly circumscribed by time limits: generally, four years; in cases where HMRC can prove carelessness, six years; and where HMRC can prove deliberate underpayment (that is, fraud), 20 years.

These time limits are essential for an effective and fair tax system. Why should HMRC be required to repay tax that appears to have been overpaid from, say, 10 years ago? How can taxpayers be expected to remember, or prove the source of a one-off credit to their bank statement more than a few years ago? These time limits recognise that no system is perfect but fairness dictates that both sides are entitled to a sense of finality after a few years.

This concept is not unique to tax. The Limitation Act 1980, colloquially referred to as the statute of limitations, makes similar provisions ensuring that, if disputes are to be litigated, proceedings are to commence within specified time limits. As noted by the Supreme Court in 2012, such time limits have existed in this country for four centuries and reflect “a fundamental and all but universal legal policy that the litigation of stale claims is potentially a significant injustice”.

It is with this in mind that I have objected strongly to the 2019 loan charge, due to be introduced this week. The charge has sometimes been justified by HMRC and the Treasury as necessary to combat a form of tax avoidance in which taxable earnings were converted into (what are effectively) non-taxable loans.

It has courted considerable controversy. The House of Lords Economic Affairs Committee and almost 200 MPs expressed strong concerns or downright opposition, partly because many taxpayers caught by the charge were not seeking to avoid tax, but were instead contractors who were paid unwittingly through these arrangements (in some cases by agencies employed by government departments, including HMRC) and partly because the loan charge followed years without any effective action from HMRC to tackle the arrangements.

These factors alone should make one think twice before upsetting the checks and balances in the tax system. However, I propose to adhere to the broader principles concerning the importance of time limits.

HMRC’s data are somewhat misleading in relation to these arrangements. However, in some cases, it is clear that the authority did enough to protect its own position, mainly by opening inquiries, but sometimes remedying the situation with a discovery assessment. (For these purposes, I shall ignore the documented cases where inquiries were formally concluded by HMRC without it making any challenge to the arrangements.)

In these cases, HMRC is in a position to assert the ineffectiveness of the arrangements and can effectively require any taxpayer who takes a different view to take the case to the tax tribunal, where the matter can be resolved by an independent judge. I am indeed aware of a number of cases at different stages along that process.

For the other cases where HMRC missed its opportunity to challenge a taxpayer, it is my firm view that it should be the end of the matter — it is simply a consequence of the protections being conferred by the statutory time limits.

The loan charge cuts right across those safeguards and imposes a retrospective (some say retroactive) tax charge. For cases in the second category, the charge provides HMRC with a second opportunity to collect tax which it would not otherwise have. For cases in the first category, it means that any litigation by taxpayers is largely pointless because HMRC will get the tax another way.

Indeed, the Treasury’s recent report contains the rather sinister message that the loan charge was introduced because HMRC considered that allowing taxpayers to exercise their constitutional right to challenge HMRC “was not . . . effective”.

As the chancellor said (while in opposition), all taxpayers are “entitled to be protected from retrospective or retroactive legislation”. I wholeheartedly agree. I just wish he did.

Keith Gordon is a barrister practising from Temple Tax Chambers in London. He tweets on tax-related matters from @keithmgordon

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