Tax avoidance can be a very divisive issue. Whilst tax planning is perfectly legal and tax evasion is illegal, tax avoidance sits in the middle along a spectrum whose precise location is determined by your personal moral compass. It is therefore very difficult to legislate where the interpretation of a scheme or action is so subjective. The recent situation regarding employee loan trusts and the subsequently introduced loan charge has added a layer of complexity and discussion surrounding the avoidance issue.
The Court of Public Opinion
In recent years HMRC have managed to move public opinion such that avoidance has moved along this spectrum away from planning and towards evasion in people’s minds such that it is perceived by the man in the street as illegal. They have certainly, through the demonization of high-profile individuals who have engaged in avoidance schemes, persuaded the public that all avoidance is immoral and anyone who engages in such schemes are taking money away from our schools or the NHS. Things are rarely this clear cut and the introduction of what is, to all intents and purposes, a retrospective loan charge in relation to the EBT schemes has added a dimension that leaves an unsettling feeling amongst taxpayers, tax professionals and even MPs.
From April 5, at least 50,000 contractors who used loan-based tax avoidance schemes that HMRC has called ‘disguised remuneration’, will be subject to a loan charge. This charge will tax income on loans received up to 20 years ago in a single financial year. Many faces six-figure tax bills. However, HMRC have said that anyone earning £30,000 or less will have seven years to pay and those earning up to £50,000 will have five years.
Bankers at JP Morgan who engaged in these schemes recently got hit with a £1.2m tax charge. This attracted little sympathy with the public as they believe they are the people responsible for the financial crisis but who have never paid for it unlike the rest of us who have borne the brunt on austerity. However, other less high profile and disliked individuals entered into these schemes upon advice from professionals via promoters now face bankruptcy and, it has been alleged, have taken their own lives as a result of their financial dilemma.
It is a persuasive argument that it is the promoters of these schemes who should face prosecution advising people and organisations to set the structures up and taking healthy fees in the process. However, there has to be an element of personal responsibility as an individual taxpayer or as the financial officer of an employer. If something seems too good to be true it generally is. One promoter, Hyrax, has recently lost their case in court, but many such promoters are long gone by the time the proverbial fan is hit.
Many MPs have called for a halt to the loan charge policy which they regard as a ‘cynical attempt by HMRC to cover up past failures. Further, a cross-party group of MPs have written to Phillip Hammond accusing the Treasury of making false claims in a report about the loan charge. The report alleged the Loan Charge All-Party Parliamentary Group had failed to share with the tax authorities’ personal stories of taxpayers facing the loan charge who have been made bankrupt and taken their own lives.
MPs have accused Mel Stride, of breaching ministerial code, pointing to statements that ’20 people had been convicted of offences relating to arrangements and marketed as avoidance schemes’ since April 2016. A later freedom of information request revealed that none of these related to the loan charge.
Much research has been done on taxpayer behaviour both by the government’s behavioural insights team (the ‘nudge’ unit) and many academic institutions which demonstrate that most people want to pay their fair share of taxes either through a moral duty or an acknowledgement that peers have paid their fair share. This attitude fuels the pressure applied on taxpayers who don’t pay their fair share or are seen to be trying to avoid their tax obligations.
However, when HMRC introduce an effective retrospective charge and apply it so rigorously that taxpayers are made bankrupt and even commit suicide as a result, it would not take long before public sympathy for this body dramatically reduces. HMRC must be seen to be being fair. There are rules regarding time limits for enquiries or investigations into a taxpayer return and also on when taxpayers can claim back overpayments. It seems unfair that HMRC can go back 20 years even in cases where they have previously enquired into the returns and not raised an assessment.
HMRC need to be very careful in their attitude to tax collection if they wish to retain the public’s support or the voluntary tax compliance adopted by most taxpayers could start to wane leading to a much more adversarial environment which is in nobody’s interest.