Loan Charge 2019: Sir Amyas Morse Review

Bob Stewart Excerpts

Thursday 19th March 2020 Commons Chamber

[Mr Davis]

The right hon. Gentleman makes an extraordinarily powerful point in his own skilful way. I say this back to him: his group took that evidence before the added economic stress of the coronavirus. Many of the individuals affected will be contractors. They will be people who perhaps have no rights at the moment and certainly no way of finding the money to meet the demands on them. Even small sums of money will bring enormous pressure to bear on the individual. So he is right: this is not some vague and abstract tax issue. This is about people’s lives. That is why I was pleased when the Government launched the Amyas Morse review into the policy, and in December, he published a detailed report. I commend him for his heroic attempt to find a compromise, because that is really what he did. The facts and the conclusions are a little different, and that is because he was trying to find a compromise. However, when it comes to matters of natural justice, I am afraid that a compromise is nowhere near enough. Such a detailed review deserves detailed scrutiny, and I am going to spend a small amount of time looking at his central findings.

Sir Amyas recommended a December 2010 cut-off date for the loan charge. All loans before that date will be out of the loan charge scope. In a piece for The House magazine some time ago I referred to that as arbitrary, and Sir Amyas responded. He said:

“It is not an ‘arbitrary’ date. It is the date from which the Finance Act 2011 ensured that tax was charged on income paid through loan schemes.”

But that simply did not make sense, even in its own terms. The Finance Act was not law in December 2010; it was simply draft legislation. It was not passed for another eight months—until July 2011. HMRC does not, or certainly should not, take its instruction from draft legislation. It certainly should not take it from press releases, which was what actually went out on that day. It takes its instruction from settled law—and the words “settled law” matter.

Sir Amyas went on to argue in his piece that, once the 2011 Act was passed,

“tax should have been understood as being due from that point.”

But even in 2011 the law was far from clear after the Government suffered a series of defeats in the courts.

[Bob Stewart (Beckenham) (Con)]

My constituents just do not have any extra money—they have used it all up each year. After 2010, they were continually told by financial experts and the companies they were contracted to, “All is well—carry on.” Suddenly in 2017, they faced a massive bill, and they just cannot cope.

[Mr Davis]

I am talking about how we got to that position. I will come on to talk about the financial status of these people, but my hon. Friend is right: these are not rich people.

HMRC, which has claimed that this is clear law, lost the Dextra Accessories Ltd and Sempra Metals Ltd cases in 2002 and 2008 respectively, when the courts specifically rejected the idea that the loans could be subject to income tax. HMRC then lost a case in 2012 and again in 2014, demonstrating that the 2011 legislation had not clarified the law to the satisfaction of the courts. That is a key point—it was not a question of it not being to our satisfaction or our constituents’ satisfaction, but it was not to the satisfaction of the courts. The fact that HMRC lost twice and then won twice tells us that even experienced, highly informed judges spending a great deal of time studying these cases found it a difficult issue to resolve.

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[Sir Edward Davey (Kingston and Surbiton) (LD)]

It is a pleasure to follow the right hon. Member for New Forest East (Dr Lewis). I am delighted to say that on this occasion I agree with every word he said. It is the nature of this debate that it has brought those on all sides together. For people who normally are not necessarily in total agreement on economic and tax affairs, this has brought us together. That is for the reason the right hon. Member for Haltemprice and Howden (Mr Davis) gave: it is about natural justice.

I set up the loan charge APPG last year, and I think it has become a group that illustrates the way in which the House has come together. We now have 227 members. My co-chairs are the hon. Member for Brentford and Isleworth (Ruth Cadbury) and the right hon. Member for Hemel Hempstead (Sir Mike Penning). I should say that he wanted to be here today, but he has a family issue that has kept him away.

Not only do we represent colleagues from across the House, but I believe we have gone about our business in a pretty professional way, with the support of the Loan Charge Action Group as our secretariat. We have produced reports in the past, and as a group we have reviewed the Morse review itself and published our response. That follows two witness sessions, where we had tax experts and loan charge victims. We have received more written evidence, and we have built on our previous work. This 63-page report, published today, has 17 key findings on the Morse review and it makes 19 recommendations.

I have been on a number of all-party groups during my time in the House, as I am sure you have, Mr Deputy Speaker, and it is relatively unusual for an APPG to do such a thorough and detailed report in such a short time. If I have one disagreement with the right hon. Member for Haltemprice and Howden it is that I wish he had given us a little bit more time to do our work before this debate, although I am really pleased that we have got this debate. I hope the Minister, whatever he says from the Dispatch Box in response to this debate, will undertake to read the APPG’s report and to respond to it.

When the Morse review was set up, we welcomed it; it is what we had been seeking. We had meetings with Sir Amyas, and we gave him a huge amount of material. It is fair to say—I put this on record on behalf of the APPG—that we welcome many aspects of his report. He talks about how unusual the loan charge is and how unique it is in respect of how it overrides statutory time limits, which are meant to protect the individual taxpayer, and how it looks back over 20 years. What an astonishing piece of legislation to put forward.

The report has a number of good recommendations. For example, it says that if the loan charge continues, after 10 years of repayment any remaining liability should be written off if the taxpayer has earnings of less than £30,000. One would have thought that that was a reasonable recommendation, even if the Government want to stand by the loan charge, but they have rejected it. The Government rejected even that relatively modest recommendation.

I would have thought that Her Majesty’s Treasury and HMRC would have agreed with all the recommendations, in the spirit of the Morse review, but they have not. They have rejected some in full and some in part, and they interpret some in a way that is clearly not intended by the Morse review. For example, one group of taxpayers about whom I have been most worried is those who have had closed tax years—in other words, their tax affairs, properly given to HMRC with all the relevant material and back-up, had been accepted and the tax year had been closed. There can be no doubt that going back to such a year is complete and utter retrospection, yet the Government are still seeking to apply the loan charge to those years. They have narrowed in a most outrageous way the way we consider the concept of a closed tax year.

I am really unhappy with the way that the Government have responded to the Morse review itself, but the review does have a big flaw at its heart. Because the right hon. Member for Haltemprice and Howden set out that flaw in detail, I do not need to speak for so long. In essence, Morse says that the law that was passed in 2011 in respect of the Income Tax (Earnings and Pensions) Act 2003, and particularly part 7A, made it clear. Now, the right hon. Gentleman showed that it did not make it clear, even for those people directly linked to it, because of the timings that he set out.

In specific detail, the expert witnesses whom we saw in the APPG made it clear that that legislation covered only some of the schemes to which the loan charge applies—those schemes that involved employees who were being paid via a third party—but completely omitted entire existing schemes that involve the self-employed, companies and loans paid directly to employees. There can be no doubt that the legislation on which Morse was relying does not apply to many people, because they are just not covered by that legislation. It is not a question of debate; it is just a fact.

At the time, experts looked at the legislation and responded in the way that one would expect: they looked at what the legislation said and changed their advice accordingly. Indeed, HMRC’s advice was based on what was actually in the Act, surprisingly enough. There is a 2016 technical note to which our report refers and in which HMRC specifically says that that is what the legislation said.

I find it quite extraordinary that successive Ministers have tried to defend this double-talk from HMRC. As the right hon. Member for Haltemprice and Howden said, no court rulings in any way interpreted legislation in the way that the Morse review does. I have a huge amount of respect for Sir Amyas Morse, but on this point he is entirely wrong. I do not read all the tax literature, but the tax experts who have contacted us are really clear that Morse is getting the legislation, as it was understood the time, completely wrong.

[Bob Stewart]

When the right hon. Gentleman took evidence from people who are subject to the loan charge, did he receive any evidence to the effect that their chartered accountants or financial analysts since 2010 had told them—the people they were being paid by—that they were in real danger and had better change the way in which they paid their taxes?

[Sir Edward Davey]

We took no such evidence and no such evidence was proffered to us. It might exist out there, but we have certainly not seen it.

I do not want to detain the House any longer, as I have made my core point. The whole reason why this has been such a big issue and has united the House is that the loan charge is retrospective, and that is unfair and wrong. We have to defend individual taxpayers, even if we think they might have been ill-advised in the first place. We have to defend the law. Why do we meet in this House? Why do we pass laws, unless we come back here and say, “Government—you’re breaking the law”, and hold them to account for that? That is our constitutional job, and I thank right hon. and hon. Members from across the House for doing their duty.

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[Bob Stewart (Beckenham) (Con)]

In 2018, when a group of constituents first came to my surgery to complain about their treatment by HMRC, I was not particularly sympathetic—they were talking about loan schemes, of course. After all, why should a group of people use schemes to pay less tax than the rest of us? If they do not pay their fair share, others have to make it up, or so I thought. I was actually too harsh, not because people should not pay their fair share of tax, but because I did not understand the circumstances until they explained their predicament.

First, the people I met were clearly not out to defraud the system. They did not look or sound like petty criminals. They were normal, decent and honest. Some explained that they did not even have a choice, as we have heard: either they used a loan scheme or they would not be employed by the company or, in some cases, the state.

Secondly, as self-employed individuals, they were often contracted to different entities. Nobody but themselves, from what they earned, put aside anything for pensions, sick leave, paid holidays or, indeed, guaranteed employment. They were much less secure than someone with a permanent job.

In the interest of being quick, I have four requests of the Minister. First, I would like to see the retrospective nature of the charge removed up until July 2017, when the Finance (No. 2) Act 2017 was introduced. That makes sense to everyone.

Secondly, if that is not possible, the Government should revisit the settlement terms, which are hugely punitive. We have just heard the hon. Member for Ayr, Carrick and Cumnock (Allan Dorans) say how punitive they are, and I would like to see a radical reduction in extortionate interest rate charges and inheritance tax demands.

Thirdly, we would all find it distasteful for the Government to send out settlement terms using words that imply people have deliberately broken the law—they did not. HMRC allowed the use of loan schemes every year. It sent the tax returns back, and people thought they were doing right.

Finally, I see no reason why loan charge repayments should not be delayed by a year, rather like IR35, in response to the health crisis we are all facing. So many people are worried enough at the moment. Give them a break—give them another 12 months.

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[Peter Dowd]

Precisely—before the right hon. Gentleman was a Member, although not much before, I imagine.

[Bob Stewart]

It might be dangerous to intervene here, but I am quite sure that a lot of these financial analysts and chartered accounts honestly thought they were doing the right thing and everything was legal. They acted in good faith. I do not suppose that all of them were slightly dodgy.

[Peter Dowd]

Well, that is a view. The hon. Member for Thirsk and Malton (Kevin Hollinrake) talked about how something that looks too good to be true is too good to be true. People have to take that on board when they become in involved in such schemes, as lots of people have, right across the spectrum, from those who are pretty wealthy all the way down to people who earn quite small sums.

It is the responsibility of this House to ensure that people are treated fairly. I do not want to get into the argument about whether HMRC has treated people fairly or unfairly. I accept in good faith what Members have said today about how their constituents have been treated. That has to be set in the context of the issue of HMRC’s resources. A third of its staff have gone since cuts in 2005 and later in 2010. Any increases in the cash amounts available to HMRC for its running have, in effect, been blocked. That is a factor that we must take into account as well.

The primary issue here is whether the enablers—the people everybody has talked about today—are getting away scot-free. I suspect that the Minister will tell us the extent of the Government’s and HMRC’s action to tackle these enablers, but I suspect that it will not be enough and the Government will have to sharpen up their footwork.

Whether HMRC has been aggressive is, again, a moot point. However, we know some of the enablers have also been incredibly aggressive. The Rangers FC issue trundled on for the best part of 13 years, with enablers—the accountants and lawyers—taking it right to the line and beyond, so let us not pretend there was not aggression from those who were attempting to push and push the boundaries, hence the reason for commensurate potential retrospective legislation.

I do not want to take much time, and everything has already been said today. It is important not just that the letter of the report and all its recommendations are put in place, but that the spirit of the report in relation to closed cases and so on is taken into account, and specifically the recommendation for a £30,000, 10-year limit, which the Government rejected.

The Government should have a word—I put it as gently as that—with HMRC about people’s perception of how it has behaved. It is important for Ministers to get that view across to HMRC. As the hon. Member for Ruislip, Northwood and Pinner (David Simmonds) said, it is about balance. We need balance in dealing with this matter, and I hope the Government can get that balance right.