Finance Bill

Written evidence submitted by Small to Medium Business Group (SMB) and The Loan Charge Action Group (FB29)

Confidentiality: Non confidential for publication

This statement has been prepared by members of the Loan Charge Action Group (LCAG) who have approximately 1000 business owners, currently dealing with the problems associated with Coronovirus as well as the potential disaster of the Loan Charge Legislation. We are making a group submission along with our individual evidence submissions. We feel it is important to see the wider impact to the SMBs and the impact to the economic.

The loan charge was originally created with little scrutiny and was pressed hurriedly through parliament with little to no oversight. It is proving to be highly controversial and has been discredited by many, including an independent review chaired by Sir Amyas Morse, over 200 cross party MP’s and the House of Lords themselves. Please do not make this bad legislation even worse by accepting the items within the Finance Bill without full and thorough review and amendment, by independent and expert witnesses.

Summary

· If enacted the Finance Bill 2019-2021 will ensure the failure of a massive number of small and medium enterprises at a time when Coronavirus is already devastating the economy. 66% of LCAG member companies are either liquidating or have been liquidated. The remaining 34% are still trading in severe distress. These businesses will no longer be able to support the UK economic recovery.

· The Loan Charge is retrospective legislation, introduced without following official guidelines and goes against the principle of giving taxpayers certainty in relation to their tax affairs. It should be prospective from the date of Royal Assent.

· The scope and power of the draft legislation considerably exceeds that proposed by Sir Amyas Morse and accepted by the Government. HMRC/HMT have taken a cynical opportunity to tighten the legislation to capture far more people within the Loan Charge than ever intended by Sir Amyas.

· The legal arrangements were recommended to the vast majority of small companies by their chartered accountants. Disclosure was fully compliant with applicable law and HMRC guidelines at the time. Indeed, HMRC issued reference numbers for the majority of the arrangements, which were added to company tax returns. For HMRC to subsequently claim that they were unaware of the arrangements is factually incorrect

· Because HMRC did not act in time within their own rules, the Loan Charge was introduced to provide HMRC with a ‘second bite at the cherry’, designed to allow HMRC to bypass current tax legislation, set up by Parliament over many years to protect the tax payer against just this type of unfair action and to provide certainty for the tax payer. A large number of clauses contained within this proposed Financial Bill on this subject are further designed to destroy tax payer and company protections and must be amended to make them fairer and to prevent new damaging tax laws like these being created.

· The proposed legislation also contains re-interpretations of Sir Amyas Morse’ recommendations, designed to ‘water down’ his report and continue to capture the victims.

Recommendations

· The Loan Charge should be made prospective and only applicable after the date of Royal Assent on 16 November 2017. It is widely accepted that the Loan Charge was not made clear until this date, notably by both the House of Lords Select Committee and the APPG Loan Charge, as well as numerous tax experts.

· The draft legislation should further be amended to bring it into line with the recommendations of Sir Amyas Morse. Taxpayers should only be required to have made reasonable disclosure of their loans as recommended by Sir Amyas Morse. The stringent and very narrow requirements should be removed and replaced with a test of reasonableness.

· Limited Company protection should be retained for individual Directors. HMRC should separate taking action against an individual from taking action against a Limited Company.

· The legislation should follow current statutory time periods for HMRC action and should not allow HMRC more time by inserting the date 6 April 2019. The flexibility allowing HMRC to claim they have taken action, when in fact they took it against another legal entity should be removed. Specifically, the date 5 and 6 April 2019 should be removed. Also, the reference to action against "any other person" should be removed.

Evidence

1. This evidence is submitted on behalf of Small and Medium Sized Businesses affected by the Loan Charge legislation. A significant proportion of the Loan Charge Action Group (LCAG) membership consists of owners, directors and employees of small businesses and Limited Companies. A number of these entities remain active but many have also already been made insolvent by the Loan Charge and are either in liquidation or fully dissolved.

2. At a time of severe financial hardship for small businesses due to Coronavirus, it is very surprising that the Government further intends to unfairly penalise those very same businesses. Recent LCAG member surveys show that 66% of LCAG member companies are either liquidating or have been liquidated. The remaining 34% are still trading in severe distress.

3. Company Directors acted in good faith and in many cases re-invested their funds back into their company, for instance by hiring employees or offering additional support or salary increases to existing staff. Hence, reinvestment in some instances, likely helped local communities by providing services and employment opportunities for the area; and supported the wider UK economy, society and paid tax to the Revenue, this will be key for building back our economy.

4. The average settlement figure for limited companies is higher, by a factor of 10 or more, when compared with the (now debunked) HMRC publicised statistics. In almost every case this settlement would cripple or destroy the businesses affected. SMB’s contributed 52% of the total UK turnover (£2.2 trillion in 2018), proving how essential they are to the economic recovery. Put simply, many, many small businesses will go bust as a result of this Finance Bill and will not be able to help with the UKs recovery from Coronavirus.

5. Having to fold a company due to the Loan Charge legislation would likely cause devastating personal impacts such as fear, uncertainty, overwhelming despair and suicidal thoughts, SMB owners also have to deal with additional burdens such as having to let go staff members, which impacts not only those staff members but also their families and it has wider economic implications that at the very least lead to higher unemployment. They also have to deal with closing down their company, which they spent years trying to build from the ground up, especially after triumphing to beat the 90% fail rate for all new start-ups in the first year which has been reported by Forbes and other industry publications.

6. In almost every case, SMB owners received professional advice and recommendations from professionally qualified experts including Chartered Accountants and Chartered Members of the Institute of Taxation. They have also received the advice of promoters who had confirmed the legality of their loan arrangements with highly respected QCs. Many also took direct advice from HMRC and indeed some were employed by the HMRC under similar arrangements. At that time all the advice said it was acceptable and confirmed the arrangements were not illegal.

7. Sir Amyas Morse’s review went some way in recognising the problems and issues with the Loan Charge and the Government had said it accepted the majority of his recommendations. However, despite Sir Amyas recognising the Loan Charge legislation is retrospective, his report did not remove this aspect fully. The House of Lords Select Committee has concluded that the legislation is retrospective. The APPG Loan Charge has concluded that the legislation is retrospective. And, any reasonable person will conclude that the legislation is retrospective. It is wrong to take tax payer certainty and the rule of law away this way.

8. The vast majority of LCAG members and especially those involved with SMBs remain affected by the Loan Charge. Most have loans that fall within the period between 9 December 2010 and 16 November 2017. It would be entirely reasonable for the legislation to be enacted with an effective date of 16 November 2017, the date that the Loan Charge achieved Royal Assent. This would remove the retrospective nature of the legislation. Recommendation: The effective date of the Loan Charge should be 16 Nov 2017.

9. HMRC/HMT have taken a completely unfair advantage in their drafting of the proposed legislation. Whereas Sir Amyas made recommendations that were flexible and forgiving allowing for the very complex nature of these arrangements, HMRC/HMT have taken a very narrow and unforgiving approach.

10. Sir Amyas required a taxpayer to make "reasonable disclosure" of loans. HMRC/HMT have defined "reasonable disclosure" very narrowly meaning that practically no taxpayers will be able to meet the requirements. In the vast majority of cases HMRC were well aware that loans had been utilised. This was done either through Company accounts, through personal tax returns, or both. HMRC clearly knew that loans were being utilised but took no action. Recommendation: Loans should be considered disclosed where HMRC have been made aware of loan use either through an individual tax return or via Company Accounts.

11. Sir Amyas was quite specific in saying that if HMRC knew about the loans but failed to take action against the RELEVANT taxpayer, then the loans would not fall under the Loan Charge. However, HMRC/HMT have drafted legislation to say that taking ANY form of action against the relevant taxpayer or ANY OTHER PERSON allows them to use the loan charge. This means that if they took action against a Limited Company, then this counts as action against me an individual employee. So, HMRC can effectively transfer a liability from an Ltd Co to an individual employee, piercing the Legal protection offered by limited liability. Recommendation: HMRC should only be deemed to have taken action when this is against the relevant taxpayer.

12. The legislation also conveniently gives HMRC until 6 April 2019 to take ANY action which clearly and conveniently extends their current time limits far beyond the statutory time limits currently in place. Recommendation: The current statutory limits should be applied and the date of 6 April 2019 should be removed from the legislation.

June 2020

Please read onto the next page (appendix 1) as it contains the details of proposed amendments:

Appendix 1 – Proposed Amendments

Clause 1. Loan charge not to apply to loans or quasi-loans made before 9 December 2010

Explanatory Statement – The Loan Charge should be made prospective and only applicable after the date of Royal Assent on 16 November 2017.

Amendment - All reference to changes to the date "9 December 2010" should be changed to "16 November 2017"

Clause 3(1)(5) and Clause 3(2)(5). Loan charge reduced where underlying liability disclosed but unenforceable

Explanatory Statement – Taxpayers should only be required to have made reasonable disclosure of their loans as recommended by Sir Amyas Morse. The stringent and very narrow requirements should be removed and replaced with a test of reasonableness.

Amendment – Sections (a), (b), (c) and (d) should be removed and replaced with "… if reasonable disclosure has been made by the relevant taxpayer"

Clause 3(1)1B(1)(d). Loan charge reduced where underlying liability disclosed but unenforceable

Explanatory Statement – The legislation should follow current statutory time periods for HMRC action and should not allow HMRC more time by inserting the date 6 April 2019. The flexibility allowing HMRC to claim they have taken action, when in fact they took it against another legal entity should be removed. Specifically, the date 5 and 6 April 2019 should be removed. Also, the reference to action against "any other person" should be removed.

Amendment – All reference to "as at 6 April 2019 an officer of Revenue and Customs has not taken steps to recover from A or any other person income tax for the relevant year in respect of that amount." should be replaced with " an officer of Revenue and Customs has not taken action within the prevailing statutory periods to recover from A income tax for the relevant year in respect if that amount"

The same principle should be applied throughout clause (3)

 

Prepared 17th June 2020