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This publication is available at https://www.gov.uk/government/publications/independent-loan-charge-review-hmrc-report-on-implementation/independent-loan-charge-review-hmrc-report-on-implementation
The Loan Charge was announced at Budget 2016 to tackle disguised remuneration tax avoidance schemes, which paid income in the form of loans that were not taxed or subject to National Insurance contributions. When it was introduced, the Loan Charge was part of a package that was estimated to yield £3.2 billion over five years.
The Loan Charge, as originally enacted in Finance Acts (No. 2) 2017 and 2018, applied to any loans taken out on or after 6 April 1999. It taxed any loans outstanding on 5 April 2019 as income for the 2018 to 2019 tax year. Taxpayers were not liable to the Loan Charge if, by 5 April 2019, they repaid the loans, or settled with HM Revenue and Customs (HMRC) to pay all relevant tax liabilities and National Insurance contributions on the loans. A government report published in March 2019, Report on time limits and the charge on disguised remuneration loans, set out the rationale for the Loan Charge policy.
In September 2019, the government asked the former Comptroller and Auditor General, Sir Amyas Morse to lead the Independent Loan Charge Review (“the Review”). He was asked to consider whether the Loan Charge was an appropriate response to the tax avoidance behaviour in question, and whether changes announced by the government in advance of, and since, the Loan Charge came into effect, addressed any legitimate concerns that had been raised about the impact of the Loan Charge on individuals, including affordability for those affected. The Review was published in December 2019. In response the government accepted all but one of the twenty recommendations.
This report implements recommendation 14 of the Review, which proposed that:
HMRC should report to Parliament on its implementation of the Loan Charge before the end of 2020, drawing on input from their recently established Customer Experience Committee, representative bodies, charities focused on lower income individuals, and other professionals. This report should also address common themes arising from other recent reports, including from the House of Lords Economic Affairs Committee (EAC) and the Adjudicator.
The government accepted recommendation 14 stating:
The government accepts this recommendation. HMRC will report to Parliament on its implementation of the Loan Charge changes, once the changes have been implemented.
Changes to the Loan Charge
The Review considered the steps the government had taken to tackle disguised remuneration, recognised this was a form of tax avoidance and concluded it was right for the government to take action to ensure the tax was collected. The Review raised concerns about the impact of some aspects of the Loan Charge and recommended changes to the policy. The government accepted recommendations, including:
- limiting the scope of the Loan Charge to loans taken out on or after 9 December 2010
- that the Loan Charge should not apply to loans taken out between 9 December 2010 and 5 April 2016 where the individual had fully disclosed their use of the schemes to HMRC, and HMRC had failed to take action (for example, by opening an enquiry)
- allowing taxpayers to benefit from spreading their loan balances evenly over three tax years, instead of taxing the full amount in a single year
The Review reported ahead of the 31 January 2020 deadline for filing 2018 to 2019 tax returns. At the time of the Review, users of disguised remuneration schemes who had provided all the information needed to settle their use of disguised remuneration by 5 April 2019, could still settle with HMRC and not be subject to the Loan Charge. For taxpayers affected by the Loan Charge, HMRC have:
- extended the deadline to file a 2018 to 2019 return and pay the Loan Charge, or conclude settlement for those eligible, to 30 September 2020, and issued communications to help taxpayers understand actions they needed to take following the Review
- implemented the changes to the Loan Charge enacted in Finance Act 2020 - HMRC estimate that these changes have taken 11,000 people out of paying the Loan Charge altogether
- published policies on paying tax, and guidance to give taxpayers confidence that they can agree manageable payment terms
In the government’s response to the Review, HMRC acknowledged that we had struggled to meet the high standards of customer service we aimed to deliver and apologised to taxpayers who had experienced delays and a fragmented experience from different parts of HMRC. We are committed to helping taxpayers to get their tax right and get out of avoidance. Since the Review we have improved our service for taxpayers affected by the Loan Charge by:
- publishing guidance to explain the changes and the actions taxpayers needed to take, according to their circumstances
- writing to taxpayers we identified as potentially affected by the Loan Charge, setting out what they needed to do and, providing details of support available
- continuing to provide enhanced support for taxpayers who need extra help, including a named contact for those facing serious and pressing issues
We recognise that an effective tax system depends on public trust. Taxpayers must be able to trust that HMRC will protect the wider interests of all taxpayers by ensuring that everyone pays the tax they owe, and treat people fairly when we use our powers to secure payment from those who try to avoid or evade tax.
The Review made recommendations that are aimed at enhancing public trust in HMRC. Our activities to implement these recommendations link to wider action we are taking to deliver the government’s 10-year strategy, Building a trusted, modern tax administration system. This strategy, published in July 2020, sets out how HMRC will deliver a modern tax administration system for all our 31 million individual and 5.9 million business taxpayers. Central elements include:
- using real-time information to give taxpayers an up-to-date understanding of their tax position
- providing secure, easily accessible single digital accounts so that we can provide more personalised services
- modernising the Tax Administration Framework
HMRC take seriously our role in ensuring that taxpayers’ rights are clear and that effective safeguards are in place when we exercise our statutory powers. As well as specific actions we describe in this report for taxpayers affected by the Loan Charge, our wider action to improve taxpayer experience and ensure our powers are used with effective safeguards include:
- publishing a revised HMRC Charter, following extensive public consultation, which sets clear expectations for the standards we should meet when interacting with taxpayers - to embed the updated HMRC Charter in the way we operate, we are now defining our new Compliance Professional Standards in line with it
- evaluating HMRC’s implementation of powers, obligations and safeguards, by working with a forum of external stakeholders to review the implementation of powers, obligations and safeguards introduced since 2012
- establishing a Professional Standards Committee, to be supported by independent external experts, to consider how HMRC’s actions could affect trust in the tax system and the public perception of fairness - this committee will critically challenge how HMRC exercise powers and their safeguards supporting fair practice for all taxpayers, and provide advice on the implementation of policy reforms
- publishing more data on our compliance work, including experimental new datasets for debt, taxpayer registration performance, criminal prosecutions and tribunal decisions
- publishing our response to the 2020 Adjudicator’s Office Annual Report - our response focused on improving our approach to learning from complaints.
Tackling continuing use of disguised remuneration schemes
We remain committed to our job of ensuring that everyone pays the tax they owe including tackling the marketing and use of disguised remuneration tax avoidance schemes. To tackle continuing use of disguised remuneration and improve customer experience, we are providing targeted information to taxpayers who use these schemes at the earliest possible stage to encourage them to get out of tax avoidance. We are also bearing down on the small number of advisers who persist in promoting tax avoidance schemes and have taken the following steps since the Review:
- December 2019 – the government announced further measures to tackle promoters
- March 2020 – HMRC published their strategy Tackling promoters of mass-marketed tax avoidance schemes
- July 2020 – HMRC launched a consultation on proposals to reduce the scope for promoters (and other enablers) to market tax avoidance schemes
- 12 November 2020 – the government announced a new package of promoter measures
Structure of this report
This report sets out action we have taken to implement the Review recommendations that were accepted by the government. It follows the structure of the government response to the Review, grouping the recommendations into five sections and reporting on each in numerical order. Recommendation 10 was not accepted by the government and so does not feature here.
We are grateful to HMRC’s Customer Experience Committee, representative bodies and tax charities assisting lower income individuals who provided their views on our progress in addressing the issues identified by the Review. We have reflected key points they made in this report. In the main, they observed that HMRC have made progress in improving guidance and communications and taken positive steps to support taxpayers following the Review. However, some had mixed views about our taxpayer guidance and communications and pointed to areas for further work. Some stakeholders challenged how far HMRC have been able to change their culture and wanted to see sustained action to embed the new Compliance Professional Standards. They also wanted HMRC to continue to develop and embed the way we provide extra support for taxpayers who need it, in all our compliance work. HMRC are committed to building on the progress we have made in setting up the compliance extra support service and will continue to focus on improving customer experience during compliance interventions.
Chapter 1: Next steps for affected taxpayers
Recommendation 1: a clear timetable for response to the report
1.1 Recommendation 1 states:
The government should come forward urgently with a clear timetable for its response to this report and for any necessary legislation to give effect to these recommendations to provide taxpayers with certainty ahead of the 31 January 2020 deadline for assessment to the Loan Charge. This should include appropriate guidance from HMRC to those likely to be affected, and a means of ensuring that taxpayers have time to take appropriate advice before submitting their Self-Assessment return or – for those who remain in the settlement process – whether to settle rather than pay the Loan Charge.
1.2 When responding to the Review in December 2019, the government explained that HMRC were announcing on the same day additional flexibility for taxpayers affected by the Loan Charge. These taxpayers were given until 30 September 2020 to conclude settlement with HMRC or file their 2018 to 2019 tax returns and pay the Loan Charge, which was an additional eight months from the 31 January 2020 filing and payment deadline.
1.3 The government response also explained that HMRC were publishing more detailed guidance on action these taxpayers needed to take. The guidance was published on GOV.UK on 20 December 2019 and set out the key changes to the Loan Charge and what those changes meant for different groups of taxpayers according to their circumstances. Our guidance explained the options to taxpayers affected by the Loan Charge who needed to file a 2018 to 2019 tax return, which were to:
- submit a tax return by 31 January 2020 with a best estimate of the tax due, and amend the tax return by 30 September 2020 without incurring an inaccuracy penalty
- file a tax return on or before 30 September 2020
1.4 The guidance also explained that for both options late payment interest would not be payable on any outstanding tax for the period 1 February 2020 to 30 September 2020, as long as a complete and accurate tax return was filed, and tax paid or a payment arrangement agreed with HMRC, by 30 September 2020. For taxpayers who chose to file their return after 31 January 2020, our guidance made clear that HMRC would waive any penalties for late filing or late payment, provided a complete and accurate tax return was filed by 30 September 2020, and that they had paid, or agreed a payment arrangement, with HMRC by the same date.
1.5 Draft legislation and further guidance were published in January 2020 alongside updates to existing guidance. The further guidance provided information on key areas, including how the Loan Charge would apply to loans made in different years following changes being made as a result of the Review. The guidance also provided details for taxpayers on how to report information on loans that would be subject to the Loan Charge following the Review, information on electing to spread a loan balance over three years and information on payment options for those unable to pay in full on time.
1.6 In January 2020, HMRC wrote to more than 55,000 individuals and employers who were identified as potentially affected by the Loan Charge. Our letters informed them of the outcome of the Review with advice on what it may mean for them and the action they would need to take. Starting with these letters, we began sharing draft text of standard letters in advance with external stakeholders and acted on their feedback to ensure the tone was appropriate and the content was clear.
1.7 Legislation to give effect to changes following the Review received Royal Assent on 22 July 2020 and passed into law. In August 2020 we added to the guidance on GOV.UK published in December 2019. The additions, which we publicised through social media, and stakeholder briefings for tax professional bodies, charities and MPs, included:
- an issue briefing setting out further details for different groups of taxpayers and the steps they needed to take by 30 September 2020
- a policy paper setting out HMRC’s approach to debt collection, covering both how we support and treat customers with a tax debt
1.8 At the time of the Review 12,600 taxpayers affected by the Loan Charge were still eligible to settle under the disguised remuneration settlement terms, which were published by HMRC in November 2017. By concluding settlement before 30 September 2020 these taxpayers would not need to pay the Loan Charge. Taxpayers were eligible for the settlement terms where they had provided the information needed to settle by 5 April 2019. Following the Review, around 1,300 of those still eligible to settle were no longer liable for the Loan Charge.
1.9 While the Review was in progress, we gave taxpayers who were eligible to settle, the option to pause until the Review had reported. From April 2020 we undertook a rolling programme of writing directly to taxpayers who had asked us to pause their settlement, to explain their options following the Review and ask them if they still wished to conclude their settlement. If we received no response to our initial letter, we tried making contact by telephone to check that the letter had arrived and to offer help. We also issued a further letter advising the date we needed their response to be able to conclude their settlement by 30 September 2020. Where taxpayers did not respond to our letters or missed dates that we had asked them to respond by, and as a result could not conclude settlement by 30 September 2020, we advised them to submit their tax return and, where applicable, declare and pay the Loan Charge.
1.10 Throughout the COVID-19 pandemic, we enabled our staff to continue engaging with taxpayers eligible to settle. Around 1,000 HMRC staff supported taxpayers through the active settlement process from April to September 2020.
1.11 As shown in the table below, 5,600 employers and individuals settled their use of disguised remuneration schemes in the period to 30 September 2020. These are in addition to the around 11,000 employers and individuals who settled their use of disguised remuneration schemes between Budget 2016 and 31 March 2020, which we reported in HMRC’s Annual Report and Accounts for 2019 to 2020. Since the loan charge was announced at Budget 2016 to the end of October 2020, the value of settlements HMRC agreed and recorded with employers and individuals was around £3 billion.
Table 1.A: Settlements by 30 September 2020 (numbers rounded to the nearest hundred)
|Taxpayers eligible to settle at December 2019. (These taxpayers had provided the information needed to settle their use of disguised remuneration avoidance schemes by 5 April 2019.)||12,600|
|Taxpayers eligible to settle but no longer liable for the Loan Charge.||1,300|
|Taxpayers who concluded settlement in the period to 30 September 2020 and did not have to pay the Loan Charge.||5,600|
|Taxpayers with whom we have agreed additional time to settle because of exceptional circumstances that prevented them meeting the deadline.||1,000|
|Taxpayers who told us they didn’t want to settle and would pay the Loan Charge or who didn’t respond, or missed dates we had asked them to respond by. (These taxpayers needed to file their 2018 to 2019 tax return and pay the Loan Charge or agree a payment arrangement with HMRC)||4,700|
1.12 It is important that HMRC observe deadlines for settlement, filing returns and agreeing payment arrangements to achieve fairness for all taxpayers. We recognise, however, that where exceptional circumstances arose that meant a taxpayer was unable to conclude settlement, the impact could be disproportionate. To address this the HMRC Commissioners defined specific criteria for exercising discretion, under their collection and management powers, to give individual taxpayers additional time beyond 30 September 2020. Case-by-case reviews were undertaken to assess an individual’s circumstances against the criteria, to determine whether we could agree additional time for an individual to conclude settlement. We have also considered complaints received following the deadline from taxpayers who felt that HMRC’s action, or lack of action, had prevented them settling on time. As of 30 November 2020, we have given additional time to around 1,000 individuals to conclude their settlements.
2018 to 2019 tax returns
1.13 Taxpayers affected by the Loan Charge who were not eligible to settle, or who were eligible but did not conclude settlement by 30 September 2020, needed to file their 2018 to 2019 tax return and pay the Loan Charge, or agree a payment arrangement with HMRC, by 30 September 2020.
1.14 As of 30 September 2020, 6,300 taxpayers had filed their 2018 to 2019 tax return and declared the Loan Charge. It is not possible to reconcile all these figures back to the over 55,000 taxpayers we wrote to. The number of taxpayers returning the loan charge on their 2018 to 2019 tax returns includes people who used disguised remuneration schemes that HMRC were not previously aware of and were not included in the more than 55,000 taxpayers we wrote to. It may also include some people who completed the loan charge section in error and are not, in fact, subject to the Loan Charge.
1.15 We have so far been able to match data for over 54,000 of the taxpayers we wrote to in January 2020. The taxpayers we wrote to included individuals who did not need to file a 2018 to 2019 tax return because they were removed from the scope of the Loan Charge by the changes following the Review, and taxpayers who subsequently concluded settlement before 30 September 2020. Our data matching shows:
- more than 42,000 filed their 2018 to 2019 income tax self-assessment return by 30 September 2020 or called HMRC and told us they did not need to file a 2018 to 2019 tax return
- around 12,000 did not file their 2018 to 2019 income tax self-assessment by 30 September 2020
1.16 We are reviewing the returns we received and will undertake a range of compliance checks to verify that returns are complete and accurate, that all of those who needed to make a return have done so and to raise awareness where returns may have been filed in error. We will encourage taxpayers to make early disclosures of any errors or inaccuracies, and where there are additional liabilities, we will continue to work with taxpayers to agree affordable payment plans.
1.17 Where taxpayers have loans that are subject to the Loan Charge, they will usually have open enquiries or assessments for the years the loans were taken out. In November 2020 we published settlement terms to conclude those remaining open enquiries or assessments.
1.18 In response to concerns raised by commentators, the Financial Secretary to the Treasury made a commitment that HMRC would not apply the Loan Charge to a tax year where an enquiry had been opened into that customer’s use of a disguised remuneration scheme, and the enquiry was subsequently closed with the conclusion that tax was not due on any loans received. We have invited customers in this position to come forward and external stakeholders to share any cases they are aware of, but have not identified any taxpayers for whom these circumstances have arisen.
1.19 HMRC’s action following 30 September 2020 included:
- publishing further guidance on GOV.UK including updating our issue briefing on 8 October 2020, to explain what passing 30 September 2020 meant for different groups of taxpayers according to their circumstances, any actions they needed to take and how they could obtain additional support where they were finding issues stressful and difficult
- writing to taxpayers who did not submit their tax return or pay, or agree to pay, their Loan Charge liability by 30 September 2020 to advise them of the late filing and/or late payment penalties they have incurred and what steps they need to take to prevent further penalties being issued
- continuing to provide clear and consistent communications for taxpayers who have not yet filed their 2018 to 2019 tax returns and paid, or agreed to pay, tax owed so they may do so promptly, together with information on how to access help and support if they think they will have problems paying
- writing to taxpayers who have filed their 2018 to 2019 tax return and declared their Loan Charge liability but have not paid, or agreed payment terms, to provide information on payment options and direct contact details of HMRC’s staff who can discuss payment arrangements with them
- ensuring we work with taxpayers who are concerned about their financial circumstances due to the COVID-19 pandemic to ensure their payment terms are still suitable
1.20 External stakeholders who provided assistance to taxpayers on low incomes and unrepresented taxpayers, commented that HMRC’s guidance had improved following the Review, and that tailoring it for different customer groups had been helpful. They also felt that the additional flexibility given taxpayers to conclude settlement with HMRC or file their 2018 to 2019 tax returns and pay the Loan Charge by 30 September 2020 had been clearly communicated. Some stakeholders told us that agents would have liked a further extension beyond 30 September 2020 for all taxpayers affected by the Loan Charge to enable them to fully address clients’ issues, but felt that HMRC had worked hard to assist taxpayers conclude settlement by the 30 September 2020. External stakeholders said that HMRC’s engagement with them, to obtain their comments and feedback on draft text, prior to finalising and sending standard letters to customers, had been helpful and built trust, particularly where difficult communication challenges were shared at an early stage.
1.21 Some stakeholders had mixed views about HMRC’s communications and engagement, with individual taxpayers, particularly for represented taxpayers with agents. All stakeholders told us that a clearer view of the full range of activities across different customer groups, and more time to comment on draft text, would have helped them to better understand the sequence of activities and advise HMRC on the tone and content of standard letters. Stakeholders commented that there had been a general need for them, as well as HMRC, to recognise earlier the extent that lower paid workers were affected by the Loan Charge. External stakeholders felt that, having identified this impact, they had been more effective than HMRC in adapting their approach to support lower paid workers. Their perception was that HMRC were still finding it difficult to distinguish between different types of taxpayers affected by the Loan Charge and their different needs and that standard letters could have been better tailored to the needs of individual taxpayers. There was feedback that HMRC could have provided clearer signposting for customers about when they could expect to hear back from us and that we could have better managed taxpayers’ expectations. Stakeholders were, however, positive about the efforts made by individual members of HMRC’s staff to resolve issues for taxpayers.
1.22 The significant variation in individuals’ tax, financial and personal circumstances across the range of taxpayers affected by the Loan Charge makes it challenging to adapt our standard letters so they are tailored to the specific needs of individual taxpayers. We do, however, recognise that we can improve the drafting of the letters we send to individual taxpayers who are the subject of an enquiry. HMRC are grateful for the views expressed by external stakeholders on how we can continue to improve our approach to communicating with and addressing a broad spectrum of taxpayers in different circumstances. We will apply learning from the Loan Charge more broadly in our work with the Compliance Reform Forum. We have agreed with them to strengthen our approach to launching large-scale compliance campaigns and communicating with large numbers of taxpayers. This will include engaging with external stakeholders on, for example, the steps we are proposing to take and sequence of activities, the language and tone of our communications to ensure they are appropriate, and identification of any groups of customers that will be particularly impacted and for whom we may need to provide additional support or tailor our approach.
Recommendation 2: settlement opportunity for taxpayers outside the Loan Charge
1.23 Recommendation 2 states:
The review recommends that HMRC run a settlement opportunity in 2020, to allow any taxpayers outside the scope of the Loan Charge but with a liability arising from loan schemes to settle their tax affairs.
1.24 Where HMRC have open enquiries or assessments, taxpayers need to pay any tax liability arising from use of disguised remuneration schemes even where loans were removed from the scope of the Loan Charge, for example, because loans were made prior to 9 December 2010.
1.25 HMRC published detailed settlement terms for taxpayers with these loans in August 2020. These terms take into account changes following the Review, and give taxpayers the opportunity to settle their disguised remuneration liabilities for any loans outside the scope of the Loan Charge. Taxpayers who have used disguised remuneration schemes and taken out loans after 5 April 2019 can also use these settlement terms to come to an agreement to pay their tax due to HMRC.
1.26 Our published settlement terms explain how taxpayers can agree all relevant tax liabilities and National Insurance contributions for disguised remuneration loans, which are not subject to the Loan Charge. The settlement terms are in accordance with HMRC published Litigation and Settlement Strategy, which specifies that all settlements must be consistent with the law.
1.27 In cases where a taxpayer has taken out loans in different years, some loans may be subject to the Loan Charge while others are not. Our August 2020 settlement terms do not apply to liabilities arising from loans subject to the Loan Charge. When we published our August 2020 settlement terms, we offered taxpayers with loans in different years the opportunity to contact us and register an interest in settling all disguised remuneration liabilities, once guidance on settlement terms were published for tax years where a loan is subject to the Loan Charge.
1.28 Settlement terms for loans that are subject to the Loan Charge were updated in November 2020 to include terms for open enquiries and assessments relating to loans subject to the Loan Charge.
1.29 We are continuing to work with and support taxpayers to resolve all outstanding enquiries and assessments relating to disguised remuneration loans, in accordance with our published terms. For taxpayers who need them this includes agreeing affordable payment plans, and additional support for those finding issues stressful or difficult. Where we are unable to conclude issues by agreement taxpayers have the option of taking their case before the tribunals and courts.
Chapter 2: Loan Charge design
Recommendation 3: removing pre-December 2010 loans from the Loan Charge
2.1 Recommendation 3 states:
The Loan Charge should not apply to loans entered into before 9 December 2010.
Recommendation 4: unprotected years and reasonable disclosure
2.2 Recommendation 4 states:
Unprotected Years arising from loans entered into on or after 9th December 2010, where the relevant taxpayer made reasonable disclosure of their scheme usage to HMRC and HMRC did not open an investigation, should be out of scope of the Loan Charge (subject to recommendation 5 below). Other Unprotected Years should remain in scope of the Loan Charge. This will ensure that taxpayers do not benefit from failing to disclose their tax affairs to HMRC. The approach to defining “reasonable disclosure” should build upon HMRC’s ordinary compliance approach in considering the extent to which a Self-Assessment return is sufficiently clear about the usage of a loan scheme.
Recommendation 5: unprotected years to be included in the Loan Charge
2.3 Recommendation 5 states:
Any Unprotected Years arising from loan schemes entered into during the 2016 to 2017, 2017 to 2018 and 2018 to 2019 tax years should all be included in the scope of the Loan Charge, to ensure that taxpayers who entered into loan schemes after the Loan Charge was announced do not unreasonably benefit from HMRC having ceased protecting years following the announcement.
2.4 Draft legislation to amend the scope of the existing Loan Charge legislation in accordance with the above Review recommendations, was published on 20 January 2020. A short consultation period followed. The legislation was to have effect from 5 April 2019, which is the date that outstanding loan balances became liable to the Loan Charge. HMRC also published guidance on 20 January 2020, which was updated on 27 February 2020, to explain what the changes to the legislation meant for taxpayers and to set out HMRC’s view of what, under the draft legislation, constituted “reasonable disclosure” for these purposes.
2.5 External stakeholders raised concerns about the way that the draft legislation defined a “reasonable disclosure”. We considered stakeholders’ comments and as a result amended the draft legislation to broaden the scope of that term.
2.6 Following the amendment of the draft legislation through consultation, the government introduced legislation in the Finance Act 2020, which received Royal Assent on 22 July 2020 to bring in the following changes:
- Section 15 of Finance Act 2020 amended the date that disguised remuneration loans became subject to tax under the Loan Charge from 6 April 1999 to 9 December 2010. This change removed loans made before 9 December 2010 from taxation under the Loan Charge. Loans taken out from 9 December 2010 may still be subject to the Loan Charge, subject to any reduction under other legislation such as Section 17 of Finance Act 2020
- Section 17 of Finance Act 2020, which amended the Loan Charge legislation so that loans taken out between 9 December 2010 and 5 April 2016 are not subject to taxation under the Loan Charge where the user of the scheme disclosed on their tax return the loans and recipients, and identified the avoidance scheme used and provided any other information, which HMRC would have needed to allow them to know that income tax was due (termed a “reasonable disclosure”), and HMRC did not act to protect their position, for example, by opening an enquiry. The legislation clearly defines the criteria for “reasonable disclosure”.
2.7 These legislative changes did not change the normal taxpayer safeguards, such as appeal rights. It is open to any taxpayer who disagrees with HMRC about whether the Loan Charge applies to their loans to take the matter to the tribunals and courts.
2.8 We estimate a total of 11,000 individuals and 1,000 employers have been removed from the Loan Charge as a result of the Loan Charge not applying to loans taken out before 2010, nor to loans where a taxpayer made a reasonable disclosure between 9 December 2010 and 5 April 2016 and where HMRC failed to protect their position.
2.9 The government stated in its response to the Review, and in line with the Review’s recommendations, that where loans made before 9 December 2010 have been removed from the scope of the Loan Charge, but HMRC had protected their assessing position, for example by opening an enquiry, HMRC would continue to ensure tax is paid where it is legally due. As set out under Recommendation 2 we published detailed disguised remuneration settlement terms in August 2020 which sets out the basis on which we will conclude all remaining disguised remuneration liabilities with taxpayers affected by the Loan Charge.
2.10 In line with the findings of the Review, from the tax year 2016 to 2017 onwards loans are subject to tax under the Loan Charge irrespective of whether there had been a reasonable disclosure or HMRC had taken steps to protect their position.
Recommendation 6: refunding Voluntary Restitution elements of settlements
2.11 Recommendation 6 states:
HMRC should refund the Voluntary Restitution elements of settlements made since 2016 that were paid to settle Unprotected Years when the relevant loans were entered into: a) prior to 9th December 2010; or b) between 9th December 2010 and the start of the 2016 to 2017 tax year, where the scheme user made reasonable disclosure of their scheme usage in their tax return.
2.12 The government introduced legislation in section 20 of Finance Act 2020 requiring the Commissioners of HMRC to establish a scheme to repay relevant Voluntary Restitution elements of settlements.
2.13 These amounts were voluntary payments that taxpayers had agreed to make in respect of an unprotected year as part of settlements concluded before changes to the scope of the Loan Charge. An unprotected year is one where HMRC had not protected their assessing position, for example, by opening an enquiry.
2.14 When first introduced, the Loan Charge applied to any loans taken out after 6 April 1999, whether or not HMRC had opened an enquiry or protected their assessing position by making an assessment, with the outstanding loan taxed as income for the 2018 to 2019 tax year. HMRC’s settlement terms, published in November 2017, provided for taxpayers to include tax on loans where there was no enquiry cover or assessment as “Voluntary Restitution” so they could settle and not have to pay the Loan Charge on those loans. Changes introduced following the Review, reduced the scope of the Loan Charge and meant it no longer applied to loans taken out prior to 9 December 2010 or between 9 December 2010 and the start of the 2016 to 2017 tax year, where the scheme user made reasonable disclosure of their scheme usage in their tax return and HMRC had not protected their position. There was therefore no longer any need for taxpayers to pay Voluntary Restitution under the November 2017 settlement terms for loans removed from the scope of the Loan Charge, and for taxpayers who had already paid it was appropriate to refund this element of their settlements.
2.15 The draft legislation to effect this change was published on 27 February 2020 for consultation, formed part of the Finance Bill and received Royal Assent on 22 July 2020. On this date, HMRC published the Disguised Remuneration Repayment Scheme 2020 and taxpayer guidance setting out how the scheme would operate, including the eligibility criteria for claiming a repayment, the claims process and how the refunds would be calculated. We estimate that around 1,000 individuals and 1,000 employers would benefit either by receiving a refund of voluntary restitution paid, or from a waiver of future instalment payments if voluntary restitution was included in a settlement paid through an instalment payment plan. We estimate that about £380m of voluntary restitution could be refunded as a result of this change. The majority of this amount is estimated to be due to employers.
2.16 Between August 2020 and October 2020, we wrote to individuals and employers who HMRC knew may be eligible for a refund, or interest waiver, of the Voluntary Restitution elements of their settlements, inviting them to make applications for repayments to be made.
2.17 The application form for taxpayers to complete and return to HMRC to apply for a refund or a waiver has been designed for simplicity. It is the first of three stages of the process. We updated the Scheme documents to clarify points that aid taxpayer understanding on 9 November 2020.
2.18 Individuals and employers have until 30 September 2021 to apply to HMRC for a refund or waiver. Any taxpayer who believes they are entitled to a refund or waiver can make an application and does not need to wait for HMRC to write to them. Our published guidance provided email and telephone contact details for taxpayers who had not heard from us by 1 October 2020, so they can let us know if they think they are eligible for a refund or waiver.
2.19 As at 6 November 2020, we have not been able to complete any refunds to taxpayers. We have not been able to proceed to repayments as quickly as we expected due to the detailed work required to distinguish refund or waiver elements within complex disguised remuneration settlements. Whilst we have sought to keep taxpayers updated about progress with their refund, some stakeholders have said that they thought we could communicate more effectively with taxpayers who are in the process of applying for a refund: we are reviewing our approach. We recognise the importance of progressing repayments and are working hard to process the refund applications we have on hand.
Recommendation 7: spreading outstanding loan balances
2.20 Recommendation 7 states:
Taxpayers should be entitled to opt to spread their outstanding loan balances over three years, to mitigate the impact of taxpayers paying tax at a higher rate than they ordinarily would. This reduces the effect of stacking their outstanding loan balances into a single year, which artificially created an increased exposure to a higher rate of income tax.
2.21 The government introduced legislation in section 16 of Finance Act 2020 to give taxpayers the option to elect to spread their outstanding loan balances over the three tax years, 2018 to 2019, 2019 to 2020, and 2020 to 2021.
2.22 Spreading the loan balance gives individuals greater flexibility on when it is subject to tax. For some taxpayers, making the entire outstanding loan balance taxable in 2018 to 2019 may mean some or all of the loan balance is charged to higher rates of tax. Depending on a taxpayer’s other tax liabilities, spreading the loan balance over three years may mean that less of the balance, or in some cases none of it, is charged to higher rates of tax. Spreading the loan balance can also help with affordability for taxpayers because the full Loan Charge liability is not charged in one year.
2.23 In February 2020 we published guidance for taxpayers on GOV.UK on reporting and accounting for the Loan Charge, which included advice on making an election to spread the outstanding loan balance over three tax years. We updated the guidance in April 2020 to advise that the online Loan Charge reporting form had been updated. Those who wanted to spread their Loan Charge balance, needed to use the loan charge reporting form to provide details of their disguised remuneration loans, and select the option to spread their balance over three tax years.
2.24 HMRC estimated that up to 21,000 individuals might see the amount of tax they needed to pay under the Loan Charge reduce as a result of the changes to allow taxpayers to spread their loan balance over three tax years. As of 30 September 2020, 1,740 elections to spread outstanding loan balances had been made.
2.25 We received feedback from some external stakeholders that the time allowed to make an election may have been suitable for those who were aware of their Loan Charge liabilities. However, they said that for those who were coming to this later, perhaps after HMRC had written to them in April 2020, the timeline could feel too tight. They therefore asked HMRC to handle late elections to spread the loan balance over three years sympathetically and pragmatically.
2.26 To help support taxpayers and simplify the steps they need to take to comply with the Loan Charge, we will exercise discretion under the legislation to automatically accept late elections until 31 December 2020. This helps people who are filing their 2018 to 2019 return after the 30 September because they can elect to spread their loan balance over three years at the same time as filing their 2018 to 2019 tax return, without having to take additional steps. It also helps HMRC understand the tax liability due, so where someone needs more time to pay, we can agree the correct payment arrangement more quickly. We published a Statement of Practice on 19 November 2020 explaining that from 31 December 2020 we will not generally accept late elections but will continue to exercise discretion to accept late elections on a case-by-case basis where there are exceptional circumstances.
Recommendation 8: review future policy on interest rates
2.27 Recommendation 8 states:
The extent to which the Loan Charge looks back to activity in earlier tax years dating back to 1999 to 2000, and the manner in which ongoing interest is charged on payment arrangements has given rise to concerns over how policy on interest is applied within the tax system. The government should review future policy on interest rates within the tax system and report the results to Parliament by 31 July 2020.
2.28 The government published its review of future policy on interest rates within the tax system on 3 December 2020. This was later than originally planned because the work was paused in the initial stages of responding to the COVID-19 pandemic.
2.29 The interest review compared the rates at which HMRC charge and pay interest to taxpayers with those applied by six, similar tax authorities internationally and with commercial interest rates used in the financial products market. The interest review also considered HMRC’s communication with taxpayers who are liable to interest, particularly where this dates back many years.
2.30 The review found that:
- HMRC’s practice of applying a higher rate of interest on unpaid tax than on overpaid tax reflects commercial practice and is in line with the application of interest by tax authorities in other jurisdictions such as Australia, Canada and New Zealand
- when compared with tax authorities internationally, HMRC were found to charge one of the lowest rates of interest on underpaid tax but also pay a lower rate of interest on overpayments than some other tax authorities
2.31 The interest review made recommendations including that:
- HMRC should have discretion to reduce interest in exceptional circumstances
- the amount of interest should not exceed the amount of tax payable by a taxpayer
- HMRC should retain their existing interest rates formula, which is in line with international tax authority practices
2.32 The recommendations of the interest review will affect all taxpayers that HMRC collects tax from, or repay tax to, and will therefore have a wide impact.
Chapter 3: Paying the Loan Charge
Recommendation 9: only paying up to half of disposable income each year
3.1 Recommendation 9 states:
All individuals subject to the Loan Charge should only be asked to pay up to half their disposable income each year and a reasonable proportion of their liquid assets. No one should have to sell their primary residence or use their existing pension pot to pay the Loan Charge.
3.2 HMRC published guidance in January 2020 to make more transparent our approach to taxpayers who are unable to pay their tax liabilities in full and on time. This guidance made clear our existing practice that individuals would not have to pay more than 50% of their monthly disposable income towards their tax liabilities, unless they have a very high level of disposable income. It explained to taxpayers how they could contact and work with HMRC to agree an arrangement to pay the tax they owe in instalments (referred to as a ‘Time to Pay’ or TTP arrangement). In December 2019 and August 2020, we re-stated our commitment that HMRC would not force taxpayers to sell their main home to pay disguised remuneration tax debts or the Loan Charge, which had been confirmed as HMRC’s policy prior to the Review.
3.3 In August 2020 we published guidance on GOV.UK to explain how we treat and support taxpayers with tax debts. Specific points include that:
- pension payments are treated as income, including any lump sums on retirement, so we will include these in our assessment of a taxpayer’s ability to pay a debt
- we will not ask taxpayers to release funds from their existing pension pots
- our policy is that we will not force anyone to sell their main home to pay their disguised remuneration tax debts or the Loan Charge
- we will only start the process of collecting a debt using our enforcement powers where we are unable to reach an agreement, or where taxpayers are unwilling to engage with us in finding a way forward
The guidance also explained that where a taxpayer has the means to pay their tax debts by selling assets, we would discuss these options with them. The guidance further explained that where a taxpayer has assets that could be released, we would expect them to be used to reduce the debt as much as possible before a TTP arrangement would be agreed.
Recommendation 11: extending payment terms
3.4 Recommendation 11 states:
HMRC should extend to individuals with income from £30,000 up to £50,000 in 2017 to 2018 the same payment terms that were offered to such individuals who settled their tax affairs rather than pay the Loan Charge. Such individuals should be automatically able to pay the Loan Charge over up to five years without having to provide HMRC with further details of their asset ownership.
3.5 HMRC made clear, in guidance published in December 2019, that individuals with income of less than £50,000 in the 2017 to 2018 tax year could choose to pay the Loan Charge or a disguised remuneration settlement in instalments, without providing detailed financial information. The guidance also set out that we would:
- agree TTP arrangements for up to 5 years for individuals who do not have disposable assets and whose income was less than £50,000, without any need for detailed financial information to be provided
- agree TTP arrangements for up to 7 years for individuals who do not have disposable assets and whose income was less than £30,000, without any need for detailed financial information to be provided
- agree TTP arrangements on the basis of financial information provided for individuals whose income was more than £50,000, or who needed longer to pay than the periods above, with no maximum time limit for agreements
3.6 As of 31 October 2020:
- for taxpayers who needed to pay the Loan Charge, we have agreed 298 TTP arrangements
- for taxpayers who settled their tax affairs rather than pay the Loan Charge, a sample of 2,550 individual settlements showed approximately 40 per cent required extended payment arrangements and 60 per cent did not require extended payment arrangements
Recommendation 12: funding an external body to provide independent debt advice
3.7 Recommendation 12 states:
HMRC should fund an external body to provide independent advice to lower income taxpayers who are discussing payment arrangements and debt collection with HMRC, including on potential suitability of an individual voluntary arrangement (IVA) or other arrangements.
3.8 Ahead of 30 September 2020, HMRC arranged a referral system for taxpayers impacted by the Loan Charge to obtain free, independent debt and financial advice. Taxpayers who were in discussion with us about payment arrangements were referred to these services.
3.9 HMRC have now funded Money Advice Trust (MAT) for three years, from 2020 to 2023, to provide debt advice specifically tailored to taxpayers who were impacted by the Loan Charge, free at the point of need. MAT debt-line advisers have been provided with details of the background and policy intent of the Loan Charge, so they can better understand and support these people. As an independent organisation, MAT will work with those impacted to prepare a joint assessment of affordability, which HMRC will accept and use when agreeing a TTP arrangement. Advice that MAT are able to provide can include the potential suitability of an individual voluntary arrangement (IVA) where appropriate to an individual’s personal circumstances.
Chapter 4: Other recommendations for the tax system
Recommendation 13: updating taxpayers at least annually
4.1 Recommendation 13 states:
HMRC should update taxpayers at least annually about the status of open tax enquiries and, where they do not do so, have this non-communication taken into account by the First-tier Tribunal (FTT) if a taxpayer applies to have an open enquiry closed.
4.2 HMRC provided guidance for compliance staff on keeping taxpayers informed in February 2020 through an update to the HMRC Compliance Handbook. The guidance makes clear that an Enquiry Officer must inform a taxpayer where a case is on hold for any reason, and provide a further update to the taxpayer of the current situation no later than ten months after any previous contact. This explicitly applies where an enquiry may be on hold due to other ongoing actions, for example where HMRC are following a strategy of focusing on a small number of lead taxpayer cases to obtain tribunal or court decisions, and then settling with other taxpayers who used the same avoidance scheme, in line with those decisions.
4.3 HMRC’s new Compliance Professional Standards seek to support and embed regular communication with taxpayers during compliance checks and emphasise the importance of keeping in regular contact with taxpayers. HMRC are aligning our new Compliance Professional Standards closely with the updated HMRC Charter and embedding them with our staff. We plan to publish them in the next financial year.
4.4 We have launched a programme of writing to taxpayers with open enquiries relating to their involvement in tax avoidance schemes. This is ongoing and we expect it to be completed in the first quarter of 2021. These letters provide information to taxpayers who have open enquiries but who may not have heard from HMRC within the previous 12 months.
4.5 We have shared draft text with representative bodies to obtain feedback on the tone and content of letters, to ensure it is appropriate for the full range of taxpayers we are writing to.
4.6 The taxpayers we are writing to include those with closed enquiries where the taxpayer’s tax position has not become final, for example, where they have appealed against enquiry closure notices and the avoidance scheme is the subject of ongoing litigation.
4.7 Where taxpayers need additional support, our teams will ensure that any contact and follow up assistance is appropriate to their needs. We have also improved our guidance to better signpost the extra assistance available for taxpayers who need it.
4.8 The information sheet provided when HMRC open an enquiry includes information about a taxpayer’s statutory right to apply to the First Tier Tribunal (FTT) for an enquiry to be closed. Where there has been a prolonged period, during which a taxpayer has not received any communication from HMRC, they can raise that delay as a factor in any application they make to the tribunal.
Recommendation 15: reviewing the HMRC Charter
4.9 Recommendation 15 states:
HMRC should review its charter to set higher expectations of performance during interactions with members of the public, and to ensure that staff are trained to meet these expectations.
4.10 HMRC launched their updated Charter on 5 November 2020. The HMRC Charter fulfils a statutory requirement to “include standards of behaviour and values to which Her Majesty’s Revenue and Customs will aspire when dealing with people in the exercise of their functions”.
4.11 HMRC ran an external and internal consultation exercise to review the HMRC Charter between 24 February and 15 August 2020, seeking views by:
- forming a Charter Steering Group with external stakeholders from the tax community to seek advice on the consultation, as well as presenting at numerous external stakeholder groups
- running six customer focus groups to hear directly from taxpayers
- running an internal consultation including HMRC’s frontline staff focus groups
4.12 There was good engagement with over 50 responses received from individuals, tax professionals and HMRC’s staff, including detailed submissions from several tax community stakeholders. HMRC have published a consultation response document that summarised responses on the themes of content and tone, internal and external visibility, and measurement and oversight.
4.13 The updated Charter sets out the standards for HMRC, which came immediately into effect when it was launched on 5 November 2020. It has been developed to strike an appropriate balance between being sufficiently accessible for unrepresented taxpayers, being practical to enable standards to be embedded effectively within HMRC and providing enough clarity and detail for tax professionals.
4.14 We have taken a number of steps to ensure the new Charter is embedded within HMRC’s day to day business and the standards are a core feature of staff training and working practices, for example:
- developing training across HMRC’s business areas to build priority skills mapped against the updated HMRC Charter, writing in taxpayer-friendly language and supporting taxpayers who need extra help. We have delivered new training material related to the Charter, which has been accessed 40,000 times by HMRC staff so far this year, and we are continuing to develop and roll out new modules
- structuring new Compliance Professional Standards around the updated HMRC Charter, which we plan to publish in the next financial year
- developing principles of support for customers who need extra help to underpin the Charter commitment to provide “extra support if you need it” and support HMRC’s responsibilities under the Equality Act 2010. The principles, released on the same day as the new Charter, set out the key support channels available to taxpayers. Our principles also explain how we work with the voluntary and community sector to support taxpayers with their tax and benefits and signpost a range of extra help on GOV.UK and in guidance for HMRC’s staff
- continuing to consult quarterly with the Charter Stakeholder Group. Feedback from these meetings will be fed into a new Charter performance review with the Customer Experience Committee each quarter. The Adjudicator has recently joined the Customer Experience Committee, as requested by some consultation responses, and will provide valuable additional external perspective to the committee’s discussions
4.15 On the Charter page on GOV.UK we ask taxpayers to tell us about their experiences of interacting with HMRC and to make a complaint if they are not satisfied that the Charter standards have been met.
4.16 External stakeholders identified the importance of ensuring the meaning of the HMRC Charter is fully understood and applied by HMRC’s staff in their working practices. The activity outlined above will help ensure this happens.
Chapter 5: Future approach to tackling disguised remuneration avoidance schemes
Recommendation 16: explaining how future loan scheme usage will be tackled
5.1 Recommendation 16 states:
Given the one-off nature of the Loan Charge, the government should explain how it will tackle loan scheme usage in the future.
Recommendation 17: improving the market in tax advice
5.2 Recommendation 17 states:
The government must improve the market in tax advice and tackle the people who continue to promote the use of loan schemes, including by clarifying how taxpayers can challenge promoters and advisers that may be mis-selling loan schemes. There should be a new strategy published within 6 months, addressing how the government will establish a more effective system of oversight, which may include formal regulation, for tax advisers.
5.3 HMRC are clear that disguised remuneration tax avoidance schemes do not work and can result in unintended tax consequences for taxpayers. The government and HMRC are committed to continuing to take action to tackle these schemes and the promoters who market and design them, improving the market for tax advice, and communicating with taxpayers to warn them of the risks of entering avoidance schemes at the earliest stage possible.
5.4 The actions set out below build on existing work and previous government announcements. We continue to consider what further action we can take to disrupt the promotion and sale of disguised remuneration tax avoidance schemes. Where schemes continue to be promoted, HMRC will investigate the schemes and their promoters with a view to both disrupting the scheme and challenging the promoters and enablers of tax avoidance to change their behaviours. Our aim is that they cease to be involved in selling tax avoidance schemes and that we minimise the number of people who become involved in schemes.
5.5 In March 2020, HMRC published their strategy for Tackling promoters of mass-marketed tax avoidance schemes. The strategy sets out our approach to promoters, which includes helping taxpayers to steer clear of avoidance schemes through early intervention and awareness campaigns and policy measures that tackle tax avoidance including disguised remuneration schemes.
5.6 These policy measures were announced by the government in March 2020, as a package of measures to build on existing work and past legislation, to further strengthen HMRC’s ability to tackle promoters. These measures were the subject of a consultation, which ran from 21 July 2020 to 15 September 2020. The measures comprise:
- ensuring HMRC can more effectively issue stop notices to promoters to make it harder to promote schemes that do not work
- preventing promoters from abusing corporate entity structures to sell avoidance schemes in order to avoid their obligations under the Promoters of Tax Avoidance Schemes (POTAS) regime - this will ensure HMRC can obtain information about the enabling of avoidance schemes at an earlier stage, and penalties for those who enable avoidance schemes are felt without delay once a scheme has been defeated at tribunal
- ensuring HMRC can act decisively where promoters fail to provide information about their avoidance schemes
- making further technical amendments to the Promoters of Tax Avoidance Schemes (POTAS) regime so that it continues to operate effectively, and to ensure that the General Anti Abuse Rule (GAAR) can be used where partnerships are involved in avoidance schemes, as intended
5.7 The government is committed to taking further action against promoters and on 12 November 2020 announced a second package of measures to further strengthen HMRC’s ability to tackle promoters and complement the package of measures we consulted on in July 2020. HMRC will consult on this second package of measures in the spring of 2021, it includes:
- making it harder for offshore promoters to access the UK, by making their onshore partners equally responsible for any anti-avoidance regime penalties the offshore promoter incurs
- directly tackling the secrecy that promoters rely on, by giving taxpayers more information on the reality of what is being sold to them
- ensuring promoters face quick and significant financial consequences for promoting tax avoidance so promoters cannot continue to profit while HMRC investigate them
- providing HMRC with additional powers to shut down promoters that continue to promote schemes and sidestep the rules designed to restrict their activities and stop them from setting up similar businesses
5.8 We reported on other action we have taken to tackle tax avoidance promoters and enablers in HMRC’s Annual Report, including doubling our resources on this work during financial year 2019 to 2020, with over 50 interventions on promoters and their supply chains.
Tax advice market
5.9 Good advisers are vital to an efficient tax system and HMRC has long recognised their value in helping clients to get their tax affairs right. Competent tax advisers with high standards help taxpayers access reliable tax advice and ensure that they pay the right amount of tax at the right time. In 2009 the code of practice on taxation for banks was introduced. In March 2017 the accountancy profession strengthened their code of conduct in relation to tax avoidance (referred to as the Professional Conduct in Relation to Taxation). Since then, the vast majority of major accountancy, legal and banking firms, and others who are members of the professional bodies, no longer design or sell mass marketed avoidance schemes. Today’s promoters are rarely members of professional bodies and will take every opportunity to sidestep the rules, so that they can continue to market their schemes.
5.10 To improve trust in the tax advice market, a call for evidence was launched on raising standards in the tax advice market and ran from 19 March 2020 to 28 August 2020. We sought views and evidence on issues including the effectiveness of HMRC’s interventions to tackle bad practice by tax advisers, and possible approaches to raising standards. We also sought views on increasing consumer protection for taxpayers, including where taxpayers rely on advice from a promoter of a tax avoidance scheme who does not give them full, objective advice. 83 written responses were received with 34 from individual agents, 24 from representative bodies and 7 from others. We published our response to the call for evidence on 12 November 2020, which includes the government’s proposed next steps on raising the standards of the tax advice market including:
- running an external consultation exercise in 2021 on the definition of tax advice and introducing a requirement for tax advisers to hold professional indemnity insurance
- reviewing and raising awareness of HMRC’s powers to enforce the Agent Standard and publish the outcome of that review
- continuing to work in partnership with adviser professional bodies on the role they play in supervising and supporting their members and raising standards in the profession
5.11 Disguised remuneration tax avoidance schemes continue to be marketed despite extensive action taken by the government and HMRC against them, over the course of the last two decades. Between April 2019 and May 2020, HMRC identified over 45 disguised remuneration tax avoidance schemes being marketed, aimed at individuals and designed to avoid tax on employment income.
5.12 HMRC launched a call for evidence on tackling disguised remuneration tax avoidance that ran from 21 July 2020 to 30 September 2020. We sought views and evidence on issues including the drivers of continuing use of disguised remuneration tax avoidance, and what further action the government and HMRC can take to tackle this type of tax avoidance. This included seeking views on promoters, employment supply chains and how we can go further to help taxpayers steer clear of and leave avoidance schemes. We are analysing the responses and plan to publish a summary of responses and our next steps in Spring 2021.
Recommendation 18: enhancing communication with taxpayers
5.13 Recommendation 18 states:
The strategy for communicating what is considered tax avoidance must be improved to reflect the ‘mass market’ nature of loan schemes. In particular, HMRC should continue enhancing its usage of Pay As You Earn (PAYE) Real Time Information to communicate with taxpayers who they suspect may be engaging in tax avoidance, and proactively put taxpayers directly on notice of its view.
5.14 Prior to the Review HMRC had been piloting a programme to write to taxpayers where our data suggested they may have started to use a disguised remuneration avoidance scheme. The aim was to write at the earliest stage possible to encourage taxpayers to leave the avoidance scheme before they built up a big tax debt. This is often referred to as “early intervention”.
5.15 In June 2020 we launched a large-scale programme of targeted early interventions with taxpayers who our Pay As You Earn (PAYE) Real-Time Information suggested had started to use disguised remuneration tax avoidance schemes. Our interventions are supported by online advice on GOV.UK that we can refer taxpayers to, and include contacting taxpayers individually at the earliest possible stage with letters to:
- advise them that in our view they may be involved in a tax avoidance scheme
- explain the risks associated with this
- explain what action they can take to end their involvement
- provide them with details of our relevant publications and contact details if they need support
5.16 The main aim of our early intervention work is to make the taxpayer aware of our view regarding their arrangements. Early intervention also encourages taxpayers who have joined tax avoidance schemes on the advice of an intermediary or employment agency, or who are now thinking twice about their participation, to get out of avoidance.
5.17 We also write to taxpayers where our data suggests they have used a tax avoidance scheme recently. The contractor labour market fluctuates, and some contractors may use two or three disguised remuneration tax avoidance schemes in the course of a year, depending upon the length of their contract with a particular end client. Those who may have stopped using a scheme recently may be tempted to use another scheme in the future.
5.18 The aim of the letters issued to recent scheme users is to:
- make them aware of our view of the arrangements
- make them aware of any tax liability
- discourage them from participation in further schemes
5.19 Using a continuous risk assessment of monthly PAYE Real-Time Information returns, we now identify both users of new tax avoidance schemes and new users of existing schemes as they join the schemes.
5.20 We are writing to taxpayers as soon as possible, the aim being to do so within four weeks of identifying their participation in a scheme.
5.21 As of 30 October, HMRC had issued over 18,000 letters to taxpayers who our data suggests are using a tax avoidance schemes or who have recently used a scheme.
5.22 We issued letters to taxpayers that our data suggested were using a tax avoidance scheme for the first time in each of the months from July to November 2020.
5.23 Our aim is that, by 31 December 2020, we will have written to all taxpayers who our data suggests are active and recent users of tax avoidance schemes. We plan to evaluate our early intervention work to assess its effectiveness in persuading taxpayers to leave avoidance schemes.
5.24 While the letters do not require taxpayers to contact us, over 800 people have done so. There has also been discussion about our early intervention work on the external Contractor Forum, an internet site for those in the contractor labour market. We will analyse these responses and use that insight to develop the next stages of the campaign, which will include following up with taxpayers who choose to stay in avoidance schemes.
5.25 HMRC published a report on the use of marketed tax avoidance schemes in the UK, alongside a communications campaign to educate and assist taxpayers on 26 November 2020. The aim of the campaign is to educate taxpayers about disguised remuneration tax avoidance, so that they steer clear of these schemes. The campaign communications include case studies on GOV.UK that share the experiences of taxpayers who have previously been involved in tax avoidance. We are working with external stakeholders to publicise these case studies and to raise awareness of the support we provide to taxpayers to help them recognise when they are involved in tax avoidance and how to take corrective action.
5.26 We are planning to launch a further campaign in early 2021, targeted at taxpayers in specific economic sectors where promoters are particularly active. We will advise taxpayers on how to identify tax avoidance schemes, the risks involved and where they can obtain further information so that they are able to make informed choices.
Recommendation 19: developing impact notes relating to tax changes
5.27 Recommendation 19 states:
That future published government impact notes of tax changes should take proper account of the direct impact on the affected population. These assessments should also explicitly include interactions between different taxes.
5.28 The government is committed to using taxpayer insight and data to ensure the taxpayer impacts of tax policies are identified and understood, including for low-income individuals and families. The government considers the cumulative impact of policy changes on different taxpayer groups to understand the overall impact and, if negative, considers actions to mitigate this.
5.29 HMRC have taken steps to strengthen Tax Information and Impact Notes (TIINs). The extent to which we are able to undertake detailed impacting analysis is dependent on the availability of necessary data, but include:
- a more stringent application of the family test to ensure all policies take full account of their potential impact
- ensuring all TIINs include an assessment of the impacts on individuals and family formation, stability and breakdown to ensure they are identified and explained
- ensuring that where potential negative impacts of a policy are identified, this is set out in the TIIN with mitigating actions identified
- ensuring TIINs detail the impact of a policy on taxpayers’ experience of dealing with HMRC, and detail mitigations where this is expected to be negative
5.30 HMRC have also strengthened their processes to ensure that where the interaction between a new policy measure and other taxes could have a negative impact on taxpayers, this is identified and set out in a TIIN. Where such an interaction is identified, we will use the explanatory memorandum to explain the impact as interactions can be complex and require detailed analysis.
5.31 Internal guidance has been updated so that HMRC’s policy makers understand how to identify impacts and explain them in TIINs. All HMRC consultation documents include a table of impacts and HMRC will ensure that consultation questions specifically ask for information on impacts. The Institute for Government reviews all TIINs that are published after each fiscal event and shares areas for improvement with HMRC. In its most recent assessment of TIINs, the Institute for Government rated HMRC’s TIINs as “good”.
Recommendation 20: responding to campaigns more effectively
5.32 Recommendation 20 states:
That, as campaigns on taxpayer issues such as the Loan Charge are likely to be a feature of debates in tax policy in future, HMRC should learn from the Loan Charge to better respond to such campaigns and communicate more effectively.
5.33 HMRC have taken steps to improve their communication with those affected by the Loan Charge, and have considered the lessons from campaign activity associated with the Loan Charge to improve future communication.
5.34 The Review recognised that HMRC have adjusted their communication approach to reduce the reliance on tax agents passing on information to their clients. Since the Review we have gone further in setting out, and regularly updating, information for taxpayers on GOV.UK to clearly set out the steps they need to take and to explain our approach. We have sought to bring this advice together to help taxpayers by providing relevant information in one place. We have also sought to improve our stakeholder engagement by seeking more feedback from tax professional bodies and charities on our communication products before they are issued. We are grateful to all those bodies that have made time to comment.
5.35 By publishing issue briefings and policy papers on the Loan Charge and debt management processes, we have taken steps to demystify issues for taxpayers. In particular, we have provided reassurance for taxpayers on our approach to debt enforcement, including our approach to insolvency. Even where HMRC’s position is already established, we recognise that we need to communicate it more widely and effectively and make it more transparent to taxpayers. We have also taken steps to set out more clearly how we will work with taxpayers who need extra support to assist them through the settlement or payment process.
5.36 We recognise MPs play an important role in highlighting concerns from their constituents. HMRC have sought more direct communication and engagement with MPs including arranging direct briefing sessions and providing MPs with briefing packs, and the Commons Library with updates on progress.
5.37 Our use of social media changed significantly in response to the campaign against the Loan Charge. Mirroring a similar drive across all of government, HMRC now provide more updates to taxpayers via social media, seeking to engage directly with the public. We have adapted our approach by publishing more material online and sharing links to it on social media. We have also provided messages to reach more taxpayers and provide the context for government policies and improved taxpayer guidance.
5.38 We have also revised our policy for protecting members of staff from abuse. We put in place processes to record and report online abuse that led to a number of social media accounts being disabled. We now have developed relationships with social media companies that enable us to fast track reports of any online abuse of HMRC’s staff.
This report has set out how HMRC have delivered the 19 recommendations made by Sir Amyas Morse, which were accepted by the government.
We have implemented the changes to the Loan Charge enacted in Finance Act 2020, which we estimate have taken 11,000 people out of paying the Loan Charge altogether. We have improved our service and the tone and clarity of our communications by:
- providing additional flexibility for taxpayers affected by the Loan Charge to conclude settlement or return and pay the Loan Charge by 30 September 2020, giving an additional eight months to take appropriate advice and act on the changes
- publishing guidance on GOV.UK and writing letters that set out what the changes meant for different groups of taxpayers according to their circumstances so they could understand the actions they needed to take
- sharing draft text of communications in advance with external stakeholders to obtain feedback on tone and content
- publishing clear policies to give taxpayers confidence that they can agree a suitable payment arrangement for their circumstances
To tackle continuing use of disguised remuneration tax avoidance schemes we are intervening early to provide targeted information to taxpayers who our data suggests are using these schemes, at the earliest possible opportunity. Alongside this we are bearing down on the small number of advisers who persist in seeking to make money by promoting tax avoidance.
We are grateful to external stakeholders who have assisted us by providing feedback and views on draft communications and legislation. In preparing the report, we are also grateful for views on our progress that have been provided by HMRC’s Customer Experience Committee, representative bodies and tax charities assisting individuals on low incomes. We have reported that in the main they observed us making progress in improving guidance and communications and positive steps to support for taxpayers following the Review. We will also act on the feedback they gave us on areas where they want us to do more.
This report has focused on HMRC’s implementation of the recommendations of the Independent Loan Charge Review. We have reported on actions we are taking to address recommendations aimed at enhancing public trust in HMRC, which fit with steps we are taking to deliver the government’s 10-year strategy, Building a trusted, modern tax administration system. We are ensuring we take account of learning from the Loan Charge through our work to embed Compliance Professional Standards and with the Compliance Reform Forum to strengthen our approach to consulting in advance of large-scale compliance campaigns and communications with taxpayers.