When the Chancellor of the exchequer appeared before the House of Commons Treasury Committee and referred to the 2019 Loan Charge, he said that tax avoidance constituted “tax evasion” — quite rightly creating quite a stir,
Tax evasion has long been illegal, and is an offence. There can be no sympathy for those who indulge in it, however, those who participated in tax avoidance schemes should not be categorised in this way. As the then Treasury minister, now secretary of state for justice, David Gauke observed in 2010, there is a distinction between tax planning (not tax evasion) and tax avoidance, “although there will be occasions when the line is a little blurred.”
The most useful definition of tax avoidance has been provided by HMRC: ‘Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law. Tax evasion is when people or businesses deliberately do not pay the taxes that they owe and it is illegal’.
Our tax laws have historically been targeted to exploit their loopholes. Many successive governments have legislated against tax avoidance schemes with the response being the creation of new schemes, which in turn drove further legislation. This ‘arms race’ became widely publicised and schemes more widely available. The scale of their mass marketing and variants has led to legislation that has become steadily bolder and wider in its scope.
The 2019 Loan charge is designed to capture all schemes predicated upon the use of loans. A key concern is its retrospective scope. It is designed to capture every loan-based scheme that has come into effect in the last 20 years and not just the approximately 5,000 DOTAS -registered schemes but, also the thousands of schemes that were subsequently designed so they did not need to be registered.
It could be argued that if tax avoidance schemes did not work then HMRC would have dealt with them already. Nevertheless, they have not, and there is both a determination and a need to maximise tax receipts.
For the vast majority of those who participated in tax avoidance schemes, some 50,000 individuals as estimated by HMRC, they would never have considered doing something knowingly illegal, and with hindsight would not have participated. In most instances, the individuals concerned were relying heavily on professional advice and moved to schemes following the effect of IR35, otherwise they would have operated under a personal service company. It is highly unlikely they would have understood the technicalities of the scheme concerned. Once in place in conjunction with the advice they received they moved from one variant to another as they continued to apply their expertise and services to the job at hand. They are now facing an accumulation of historic debt that they never believed they owed based upon PAYE and NIC, rather than the dividend tax rates that would have applied.
Being caught up in the ongoing war on tax avoidance is potentially life-changing for the vast majority, and the number of those affected is much wider than HMRC estimates. These schemes have been used in a whole variety of environments from FCA-regulated entities, those now subject to the Senior Management Regime, and even in government agencies. In the business environment, there are numerous owner managers and businesses where schemes were involved. These new measures threaten livelihoods, families, jobs and businesses.
HMRC has said it will make it as easy as possible for scheme participants to settle, but this is predicated on the basis that you pay in full, even if it takes 10 years or more, and while it continues to charge forward interest. This leaves many skilled and seasoned professionals facing real financial difficulties, with significant concerns about losing their homes, their employability and potentially bankruptcy. For those facing these challenges we would suggest they seek advice at the earliest opportunity — we are already working with many who simply cannot pay in full.
If the goal of the government is to change behaviours, the clampdown has achieved its aim already. What was once a thriving industry has almost disappeared.Maybe the chancellor’s comment belies a deeper intention, not only to outlaw tax avoidance but to position it with evasion and make it wholly unacceptable, and ultimately illegal. However, maybe he should also consider what is required to allow participants to do what they can to make amends while retaining their ability to contribute to society.