I reported a couple of weeks ago on the Loan Charge, which has left thousands of people with unexpected tax debts of hundreds of thousands of pounds and has caused stress and anxiety to the point of causing marital breakups and even suicides. There are at least 220 people in Brentford & Isleworth constituency who are affected by the Loan Charge, and I have been talking to some of them in Chiswick about the tactics used by Her Majesty’s Revenue & Customs to recoup the money. This government agency is ‘acting like a loan shark’ they say, employing ruthless tactics which they describe as ‘bullying’, adding quite deliberately to their anxiety over their debts, in a concentrated effort to make them pay up, with complete disregard to their mental health and well-being.
What is the Loan Charge?
The charge has hit freelances and contractors who used loan schemes provided by umbrella companies to receive their pay. The schemes were sold as a legal way of minimizing tax liability, and were promoted by tax advisers (some of whom continue to promote them) as totally above board. An employer paid a contractor’s wages to an agent who then ‘loaned’ the money to the employee. Because loans weren’t subject to tax, the employee paid less tax. Not everyone who signed up did so to save money. Some did it for the ease of administration, to have a company manage their tax affairs rather than having to do to themselves; others because they were told they had no choice if they wanted a particular job. In 2017 legislation was introduced which defined these schemes as tax avoidance and empowered the tax office to impose a Loan Charge. Those affected began receiving, unexpectedly, demands from Her Majesty’s Revenue & Customs for huge sums of money.
Birthday and Christmas letters
The first person I talked to about this, let’s call her Hayley, told me receiving a letter from the tax office on or around your birthday was a common occurrence among the people in her circle who are being pursued for Loan Charge debt. I’ve seen several letters which would appear to bear this out. One, dated on the recipient’s birthday, thanks her for contacting HMRC seven months earlier. Why choose that date to reply after seven months? Another arrived just before Christmas. Hayley’s interpretation is that they’re pushing the recipient’s emotional buttons:
“Having the Loan Charge hanging over you is ruining what should be happy times”.
These might have been coincidences, were it not for the fact that just in Hayley’s small circle she was able to produce six examples. The All Party Parliamentary Group of MPs, which has gathered evidence on the operation of the Loan Charge, reported last June:
‘A strange and concerning pattern has emerged with regard to the timing of correspondence; numerous examples of HMRC contacting individuals at times when the impact would be expected to cause the greatest stress. Correspondence from HMRC is also routinely received on a Friday, so individuals’ weekends are ruined by worrying about the content with no ability to contact either HMRC or a tax adviser… We have seen evidence of bankruptcy notices arriving in the days immediately before Christmas and bank holidays. In doing this HMRC forces additional worries on the individual, causing additional stress’.
Intrusive personal questions
A friend of Hayley’s, who I have not spoken to personally, told Hayley she was asked by a tax official what money was in her children’s bank accounts and what jewellery she had. Another, who I did speak to, received a phone call from an HMRC case worker about a month after his father died. He told me:
“She said: ‘I believe your father’s passed away’ and asked whether I had any inheritance”.
“I was shocked. When I put the phone down I was extremely angry and upset, as it brought a lot of the emotion back. It left me shaking and extremely hurt. I didn’t think anyone would go that low. We hadn’t even had the reading of the will at that point”.
In another call, this time with the Loan Charge helpline, the HMRC representative said they could see online how much his house was worth and asked if he could remortgage to pay the charge. When he pointed out that you’re not allowed to remortgage your house to service a debt, he was floored by their suggestion that he might say he wanted the money for an extension. That, he told them, would be committing fraud.
Tax officers are not supposed to offer debt advice. Not only is it contrary to their own, publicly available, code of conduct, but it is illegal. To offer debt advice you have to be registered with the Financial Conduct Authority, which HMRC is not. Their role is purely to collect tax.
‘Aggressive and unreasonable’ approach
The Loan Charge All-Party Parliamentary Group identified a number of tactics used by HMRC which they described as ‘aggressive and unreasonable.’ Among them were: wholly unaffordable offers, aggressive communication, threats of bankruptcy, unreasonable delays in HMRC’s responses, inconsistencies in HMRC calculations and unreasonable contractual terms for settlement, including punitive levels of interest. All taxpayer rights are ‘surrendered’ where terms of settlement are agreed and signed under the Loan Charge legislation.
MPs were ‘visibly shocked’ at the ‘clear pattern of HMRC behaviour’ towards people facing the Loan Charge, described in evidence to them by tax professionals as “bullying”, “aggressive” and even “openly lying” in some cases.
“They told my secretary I was accused of tax avoidance”
Another man I spoke to told me someone from HMRC had phoned his business and spoken to his secretary, telling her they wanted to speak to him about tax avoidance. The HMRC’s code of conduct clearly states ‘We will treat your tax affairs in the strictest confidence’ and that if you have an agent acting on your behalf – as this man did, his accountant – they will deal with them rather than call you direct. Not only did they call him direct, repeatedly, but embarrassed him in front of his staff.
He has also been contacted several times by an HMRC fraud investigator and each time he’s been told it’s not an official investigation or inquiry. He hired an ex-HMRC fraud investigator himself, to go with him to a face to face meeting and take notes. His conclusion: there was no serious allegation of fraud; the Tax officer had just been trying to pressure and intimidate him. This case is now subject to legal proceedings.
Public support for hounding tax dodgers after the financial crash
After the 2008 financial crash there was public support for the government cracking down on those big corporations and multi-millionaires who avoided paying tax. At the 2014 Lib Dem party conference, Danny Alexander, then Chief Secretary to the Treasury in the coalition government, said:
“Liberal Democrats have led the crackdown on tax avoidance… we are using psychologists and behavioural economists in HMRC to get the money quickly. Tax dodgers beware – we know where you live, we know how much you owe, and now we know how you think. Your behaviour is unacceptable, and we are coming for our money”.
Her Majesty’s Revenue and Customs were given greater powers. The team he refers to, the Behavioural Insights Team has become hugely successful, working with governments, local authorities and businesses using a ‘clearer understanding of human behaviour’ as a key part of policymaking. They have been very effective at bringing in revenue. In 2013 they won a Civil Service award for their innovative tax trial, which was estimated to have brought in around £210 million of tax revenue. The trial involved rewriting tax reminder letters to incorporate ‘behavioural economics principles’.
This is an example of the kind of phrase they use, which has been effective in getting people to pay up:
“The great majority of people in your local area pay their tax on time. Most people with a debt like yours have paid it by now.”
HMRC also send regular texts out to mobiles. Hayley has now blocked them. She says you have to give your mobile number to the tax office to verify your identity when talking to them, but neither she nor other people she’s met who are subject to the Loan Charge, who regularly receive text messages from the tax office, are aware that they have ever given permission for HMRC to use their numbers in this way.
HMRC Inefficient and illogical
While behavioural psychology is used to goad people into paying up, there is now a large body of evidence which shows HMRC to be inefficient and illogical in its approach to letting people know what they owe and what is the deadline by which they should pay it. Some of the tax office’s demands have been shown to be wrong. There are inconsistencies and miscalculations, later acknowledged by the tax office, which have left people bewildered as to how much they owe. In some circumstances, taxpayers have received Accelerated Payment Notices which say they have to pay many thousands of pounds within 90 days, while in another part of HMRC tax officers are still working out how much is owed.
‘HMRC are routinely contacting individuals to pressurise and coerce them into settling by issuing demands with arbitrary deadlines’. All Party Parliamentary Group.
Loan Charge ‘unfair and pernicious’
The House of Lords Economic Affairs Committee has also looked at the Loan Charge. In their report on Treating Taxpayers Fairly, published in December 2018, they said:
‘HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable), so it can more easily recover liabilities’.
Most of the evidence they received was from taxpayers, often in the National Health Service or working for local authorities, ‘who had been denied the opportunity to enter into a normal employment contract’. This case study, supplied to them by tax consultant Graham Webber at WTT, was typical of the kind of taxpayer who has found themselves hit by a Loan Charge:
“I have a client who is a social worker. She was made redundant by her local council. … It has a farewell party on the Friday and on the Monday it said:
“If you join this agency and use the scheme, we will re-engage you as a contractor.”
She … was re-engaged as a contractor for five years … At the end of those five years, the council told her it would re-employ her as an employee, which it did. She was unaware of what was going on. She now faces a loan charge equal to probably a year and a half’s salary. She has no means of paying it.
She is the only worker in that particular house; she has a young child and her spouse stays at home. If she goes bankrupt and it comes up on her next criminal records check, she cannot work. This is not a rich merchant banker who has done something wrong. This is a dedicated social worker. That encapsulates what the loan charge does; it is unfair and pernicious …
Yes, my contractor benefitted because she paid less tax. The Revenue was supine and silent and by its silence gave tacit approval to these schemes. In fact, that was used in the schemes’ marketing: no approach from the Revenue meant they were Revenue approved … The county council did not warn her, and the people behind the agency running the scheme, as is usual in these cases, were selective about the information that was made available.
You could argue that she should have investigated and should have known more about this, but she is a social worker, she is not a tax expert … How could a social worker be expected to penetrate that type of arrangement? It is just unfair.”
The House of Lords Economic Affairs Committee, the All Party Parliamentary Group and finally an independent review led by auditor Sir Amyas Morse have all looked at the Loan Charge and concluded it is unfair, catching honest taxpayers, who have routinely submitted their tax returns, with retrospective charges that they did not expect and cannot pay. They have all accused HMRC of overstepping the mark. Sir Amyas Morse said HMRC’s approach risked undermining the relationship between the public and the government on which the collection of taxation depends.
New Legislation and a Judicial Review
Draft legislation was introduced last week which will go some way to ameliorating the stress caused by the Loan Charge by taking out of the equation those people who used loan schemes prior to 2010, but there are still many thousands of people who owe huge sums with no means of repaying them.
The Loan Charge All Party Parliamentary Group has yet to examine the draft legislation, published on 20 January, but they are pleased the Government has accepted the recommendations made by the Independent Review, so that fewer people will have to pay it.
As to the culture of bullying by HMRC Co-Chair Ruth Cadbury MP told me: `We all expect to have to pay the tax we owe. But there is very worrying evidence of bullying and inappropriate behaviour. HMRC needs to put its house in order. They should be fair and transparent in the way they assess and collect tax”.
I spoke to one woman, let’s call her Amanda, who applied for ‘Time to Pay’. She was denied it on the basis that she earned too little to be able to make the repayments, but then got a letter saying the outstanding bill had to be paid in full. She is pinning her hopes on a Judicial Review, due to be heard in the High Court in mid-February. The Loan Charge Action Group, which represents those who are subject to the Loan Charge, has engaged renowned tax barrister Robert Venables to fight the case on the basis that retrospective taxes are a breach of their human rights.
If you are affected by the Loan Charge and would like to find out more about the Judicial Review, you can contact the Loan Charge Action Group through their website.
Read more stories on The Chiswick Calendar
See also: Debt Counselling in Chiswick