HM Revenue & Customs (HMRC) has sought to play down the significance of a private email in which its CEO appears to question the legal footing of the department’s controversial loan charge policy.
The email, disclosed as part of a document dump secured through a Freedom of Information (FOI) request, features a series of messages sent by HMRC CEO Jim Harra from January to December 2019 about the department’s ongoing efforts to clampdown on disguised remuneration schemes.
Central to this clampdown is the loan charge policy, which was introduced in November 2019 to enable HMRC to claw back the money it claims contractors avoided paying in the past by opting to have part of their salary paid out to them in the form of a non-taxable loan.
The policy has seen thousands of IT contractors receive life-changing, six-figure tax bills from HMRC relating to work they did between December 2010 and 5 April 2019, resulting in mass bankruptcies, and it has also been linked to at least seven suicides.
One of the emails sent by Harra, who at the time was serving as the department’s deputy CEO, on 31 January 2019 has been seized on by tax law experts and anti-loan charge campaigners as proof the legal arguments HMRC has repeatedly put forward to justify the policy are unsound.
The individual who submitted the original FOI request is a Loan Charge campaigner who goes by the Twitter handle @FairMinistry. “This is indeed extremely damaging for HMRC and it destroys the already shaky foundations of the Loan Charge,” they told Computer Weekly.
Specifically, HMRC’s view that non-taxable loans paid out in-lieu of a salary to contractors that participated in disguised remuneration (DR) schemes should be treated as income and taxed as such.
Anti-loan charge campaigners
The email in question was sent the day after a Treasury Select Committee hearing, with Harra making a passing reference to the social media response from anti-loan charge campaigners to the event.
“Setting aside the insults,” he said, there are some “substantive” comments emerging from the online discussion about the hearing that he goes on to share.
“The main substantive comments are… HMRC persistently claims that DR schemes never worked, but despite allegedly challenging DR schemes for the last 20 years, we have not obtained tribunal/court decisions that back up this claim. In particular we have not obtained decisions establishing that individuals are taxable on DR loans as income,” he wrote.
He then follows up on this comment by going on to seemingly detail his own abortive efforts to secure “legal analysis” to backup HMRC’s justification for the policy.
“In recent months I have repeatedly tried to obtain legal analysis to understand the strength of our claim with very little success,” wrote Harra. “For yesterday’s hearing we were initially given a summary of [tax] avoidance wins, some of which seemed to have nothing to do with DR.”
In a statement to Computer Weekly, Loan Charge Action Group (LCAG) spokesperson Steve Packham described the emergence of the email as “highly embarrassing” for HMRC, seeing as it essentially shows its own CEO calling the policy’s legal footing into question.
“The latest information exposed confirms that senior civil servants and ministers have been dishonest about the loan charge and know full well that it is not based on legal precedent and that it was introduced to allow HMRC to override the rule of law,” he said.
A similar sentiment is shared by tax barrister Keith Gordon, who told Computer Weekly the email demonstrates a “distinction between HMRC having a view about a worker’s tax position and getting a legal opinion to justify that position”.
“It demonstrates that the foundations of the loan charge were spin and HMRC’s hopes rather than any substantive legal opinion, even one coming from HMRC’s own lawyers,” he added.
The emergence of this email is also untimely for the Treasury given financial secretary Jesse Norman’s criticism of Labour MP Ruth Cadbury’s comments earlier this week during a debate about the forthcoming Finance Bill, said Gordon.
“Only 24 hours before, the financial secretary to the Treasury, Jesse Norman, sought to chastise the Labour MP Ruth Cadbury for suggesting that many taxpayers could not be expected to have recognised the correct tax treatment of these arrangements. Now it seems that the head of HMRC was having similar difficulties,” he added.
Dave Chaplin, CEO of contracting authority ContractorCalculator, expressed shock at the contents of the email, and said it reinforces why HMRC’s pursuit of contractors through the loan charge policy is misdirected.
“It’s staggering to see Jim Harra, the current CEO of HMRC, admitting in this set of emails that they have struggled to secure a legal opinion that supports the narrative they have been promoting for years,” he said.
“Legislation is the only way forward if we are to rid the industry of dodgy and repellent schemes that have been allowed to thrive and ruin the lives of hard-working contractors. Some simple fine tuning of the Finance Bill that is currently passing through Parliament could and should shut them down once and for all.”
In a statement to Computer Weekly, a spokesperson for HMRC moved to play down the significance of Harra’s admission of having “little success” in securing a legal justification for determining DR scheme loans should be taxed as income.
“These emails show Jim Harra providing challenge to HMRC officials, which is one of the functions of his office,” said the spokesperson.
As for the insinuation that the loan charge policy is based on shaky legal ground, the spokesperson cited HMRC’s 2017 victory in the Supreme Court against Rangers Football Club, which had previously used loan-based DR schemes to pay its players and senior executives.
In that case, the Supreme Court backed HMRC’s assertion that such schemes do not work, and that Rangers should have deducted income tax and National Insurance Contributions (NIC) they made to the scheme, which was operated via an offshore employee benefits trust (EBT).
“HMRC won the Rangers case at the Supreme Court in 2017 which held unanimously that contributions made by an employer into an offshore trust for the benefit of employees were subject to income tax and National Insurance Contributions at that point,” the spokesperson added.
Gordon, however, said it is wrong for HMRC to suggest the Rangers case legally justifies the loan charge policy. “As HMRC correctly point out, the schemes were eventually found out to be ineffective in that tax and NIC should have been deducted from the payments at an earlier stage of the process,” he said.
“What HMRC fail to mention, however, is that the obligation to deduct tax and NIC falls on the payer (typically, the employer) and not the employee. Furthermore, employees are given a ‘credit’ for this tax, even in cases when it was not paid over to HMRC by the employer.”