Finance (No.2) Bill

Written evidence submitted by WTT Consulting Ltd (FB20)

Finance (No 2) Bill

Submission by professional tax advisory firm WTT Consulting Ltd for the Public Bills Committee for Finance (No 2) Bill.

As invited by the Committee, we would like to present the following.

WTT Consulting Ltd

WTT Consulting Ltd is a young company (formed in Spring 2015) but which in its short history has gained a reputation for its honest, transparent and reasonable approach to the tax position of a core group of clients, namely contractors, specifically highly skilled IT contractors.

Supported by a combined total of 70 years of tax expertise, we have studied intensively the history, current position and likely future prospects of our clients in seeking to arrive at a fair and realistic position for them and HMRC.

Summary of our submission.

We do not believe that the present proposals represent a fair or balanced or perhaps legal treatment of contractors.

We believe that the present proposals have the very real prospect of causing immense harm to; the multi billion pound contracting sector; to individuals whose financial, family, physical and mental wellbeing is at stake; to any confidence that investors in the UK may seek in having a stable tax system.

We believe that HMRC has ignored warnings from Parliamentary Committees in the past over the use of retrospective legislation; has been inconsistent, incoherent and pernicious in its application of any legal analysis; has unfairly targeted a section of the taxpaying community as they are soft targets.

We believe that HMRC is ignoring, deliberately, a key Supreme Court decision – perversely an HMRC victory – as to take proper notice of the principles established there, would expose a decade and a half of wasted time, resource and opportunity to collect tax from those parties identified in the decision as being liable.

In summary, we would call for an immediate suspension of any further legislation targeting contractors, whilst an independent committee examines the policy and conduct of HMRC in this matter.

A brief history for context

Contractors have always been a vital part of the UK economy. The arrival of new ways of conducting business has seen multi national companies become flexible, agile and cost conscious in ways never dreamed of less than 20 years ago. Smaller companies have responded in similar ways.

Contracting suits such companies. They want specialist expertise for short and intense periods. They do not want long term employees dragging on their balance sheets. They do not want to train, insure, pay people whose skills may lapse within a short period.

The tax system, from the very beginning, recognises that contractors take significantly more risks than employees and as such are able to retain more of their earnings to compensate.

In 2000 however, it was decided that the contractor economy was no longer significant and that all contractors should, be default, be taxed as employees even if they did not enjoy the benefits. The exact reasons for that decision remain to this day, unknown. HMRC tried to make every contractor pay the same tax as an employee.

This failed. Not only failed but opened the door to promoters of arrangements that promised to avoid the terms of the new policy. These ideas were welcomed by contractors and more importantly by their clients. In some cases, clients insisted upon the use of certain arrangements as a condition of engagement.

In all of this HMRC was supine. The agency failed to grasp the effect that their policy had. The consequences were a series of "catch up" measures, including a blatantly retrospective measure in 2008 which targeted a very narrow range of schemes. A more general anti avoidance provision in 2010 was hopelessly loose and ill thought through and from the evidence of its application, not understood within HMRC.

Very belatedly HMRC started making enquiries – but on the wrong targets. Individuals were picked out seemingly at random and purveyors of and advisers to scheme promoters completely ignored. As might be expected, many promoters saw the writing on the wall and disappeared with the hundreds of millions of pounds of fees they had earned – mostly tax free.

Individual contractors often have enquires for intermittent years, enquiry letters followed by 10 years of silence, incorrect and invalid enquiries, enquiries for schemes they never used. Often their colleagues, in similar circumstances, have had no enquires at all, or every year has had an enquiry. Inconsistency was the only consistency.

It is also the case that the policy driving enquiries was flawed and has since been abandoned. In many instances, the presence of an offshore element to the arrangements was considered by HMRC to permit an approach via the Transfer of Assets Abroad legislation (itself arguably retrospective). Considered by many tax specialists in the commercial world to have always had a very limited chance of success and only then following a long and expensive litigation, this has now been dropped.

Instead we see the more controversial but probably cheaper and more effective use of retrospective legislation.

Finally, following many years of litigation, the Supreme Court in July 2017 handed down a short, sensible and seminal decision on the question of tax liability from the use of EBTs. This decision from Lord Hodge and his colleagues in the "Rangers" case, came to the conclusion that if an individual was to be taxed as an employee, then the primary responsibility to deduct and pay over tax, lays with the employer.

Here, HMRC at last has its reward for the policy started in 2000.

That reward is now in the process of being denied – by HMRC – application across the whole gamut of arrangements used by contractors. We see legislation attempting to reverse the effect. We see policy statements, ignoring the decision and its effects. We see "settlement" offers that completely deny the decision was ever made.

There is no adequate explanation as to why this is happening.

Some milestones on the contractors journey

Schemes that sought to make use of terms agreed in a double taxation treaty were retrospectively taxed in 2008.

Legislation in 2010 failed to identify or deal with or keep up with arrangements being pedaled by promoters.

Enquiries are inconsistent, often invalid and almost always followed by years of silence.

APN legislation in 2014, resulted in demands for many years’ worth of alleged tax due, at 90 days notice, often invalidly made, but pursued with vigour and a policy on paying that was inflexible and harsh.

Legislation announced in 2016 but not actually reduced to legislation until 18 months later which imposes a 20 year retrospection on contractors.

Promises of retrospection on transferring PAYE liabilities to individuals from employers which appears to owe more to covering maladministration and confused policy within HMRC than fairness.

Denial of the effects of a seminal HMRC victory in the Supreme Court, costing an undisclosed amount, because the decision is "inconvenient".

The present legislation

The present iteration of the Finance Bill contains a retrospective charge.

All payments made to contractors, as employees, will be assumed to taxable on them and not on the employer, contrary to the Rangers decision and applicable from 1999.

Relieving provisions are at best window dressing and at worst completely illogical.

We attach a note of the more serious concerns.

Our note also contains a series of suggestions for making amendments to the legislation to remove its retrospective effects and to provide a basis for a far settlement without compromising HMRC’s ability to chase the employers.

Some observations on the effects on individuals

A good percentage of our clients have had periods of ill health, physical and mental and attribute this to HMRC actions. In particular threats over APN collection and the threat of career ending legal action (a fact known and used by HMRC to apply pressure) for an amount that the Supreme Court holds is probably not due, are reprehensible.

HMRC action threatens to remove from the economic resources of the UK all those skills of a whole generation of contractors and inaction over the continued use of arrangements from those coming into this sector, promise a repeat performance in another 15 years.

Some final observations

The Public Bills Committee has a rare opportunity.

The Committee can (and should) examine carefully the effect of this Bill on the contracting community and consider whether pursuit of alleged amounts outstanding, left in abeyance by HMRC inaction, is worth the time, cost and reputation damage that is almost certainly the most likely outcome.

Most of our clients would settle their positions, without further dispute, if the amendments below were implemented. We have, on behalf of our clients, already offered settlement – only for that to be rejected.

HMRC is engaged in an exercise to save face following years of inaction, muddled policy and inconsistent administration. To do that, they are prepared to drive a multi billion pound industry to the brink of oblivion, use retrospective law and in many cases, dubious tactics to collect amounts that ultimately may never be due. HMRC is prepared to defy the Supreme Court in this ill founded action.

We urge the Committee to explore this matter very carefully.

Yours sincerely,

Graham Webber, Director

Summary of recommendations and amendments

The law is retrospective, certainly in effect, probably in law.

· The period to which it relates should be limited to when this measure was first introduced, 17th March 2016. Only loans after that time should be subject to the charge.

· The charge should be a rate that reflects that whilst the individual has gained a benefit, others have also. That tax rate on unpaid loans should be at 10%.

· The loan value should reflect inflation since they were drawn through a form of top slicing.

· Loans that have been written off by the lenders, with evidence provided, should be excluded as it is simply not legally possible for such loans to be repaid and use made of the exemption from the charge.

· Loans that have reduced in value for any reason so that as at the start date, 17th March 2016, the value is less than the original amount, should be charged at the reduced value, upon production of evidence.

· Loans that cannot be repaid before 2019, perhaps because the lender is untraceable, should be excluded.

· Where a taxpayer enters into an agreement to repay the loan over a period extending beyond 2019, the charge should be made on the balance at 5th April 2019 and then refunded over years after that time as the loan is repaid.

· Where the loan is repaid to a trust and the trustee, acting in accordance with instructions in the trust deed written before 17th March 2016, makes a distribution from the trust, of cash, this should be confirmed as not being part of a tax avoidance arrangement.

· Where a taxpayer is not resident in the UK at 5th April 2019, no charge should apply. (To do so extends the territoriality principle of taxation and will not give that taxpayer a credit in his now home country).

· Where an APN has been paid (or is in the course of being paid), there should be a "tax for tax" credit against any charge.

· Where it can be demonstrated that the employer should have deducted tax, credit should be given for an equivalent amount.

· The time to pay arrangements should be made a function of the number of years of loans taxed, the percentage of taxable income those loans represent in 2018/19 and ability to pay. For example, if 4 years’ worth of loans are taxed in 2018/19 and they are more than 50% of that year’s taxable income, the tax due should be collected over 4 years, without interest.

Detailed suggestions on legalisation changes

Appendix 1: Proposed legislative amendments

Page 534 – Para 1 (1) (b) to be amended to

"The loan or quasi loan was made after 17th March 2016"

Page 534 – Para 1 (7) add

(c) Where the loan cannot be repaid, it should not be regarded as outstanding

Page 535 – Para 3 (2) add

(c) where the loan has increased or reduced in value between the date drawn and 17th March 2016, the value at 17th March 2016 is the relevant principal amount

(d) where the loan has been written off or otherwise disposed of by the lender such that no legal obligation to repay remains and this has occurred prior to 17th March 2016, no charge shall arise

Page 535 – Para 3 (3) add

(c) where arrangements have been and are kept for the repayment of the loan over a period extending beyond 5th April 2019, each repayment will be treated as having occurred immediately before 5th April 2019 and the charge reduced accordingly.

Page 543 – Para 23 add

(1) Where an APN has been paid for a period and amount equivalent to the charge, credit shall be given for the value of the APN against any tax charge arising

(2) Where the employer is or should have been liable for the deduction of tax, credit shall be given for the appropriate amount against any charge arising as a result of these provisions

Page 545 – Para 25 add

(d) for the avoidance of doubt, a repayment to a lender who is obliged to redistribute funds to the taxpayer, under the terms of a legal agreement entered into before 17th March 2016, shall not be regarded as a tax avoidance arrangement

Page 549 – add paragraph 36

The tax charge under this provision shall be at a rate of 10%.

Page 549 – add paragraph 37

For the avoidance of doubt, this charge shall apply only to those resident in the UK for tax purposes as at 5th April 2019

Page 540 – add paragraph 38

Where a tax charge arises, time to pay shall be granted. This shall be payable in equal monthly or quarterly instalments over a period given by a function recognising the number of loans taxed and the proportion that amount is of the taxable income in 2018/19.

January 2018


Prepared 11th January 2018