Loan Charge 2019: Sir Amyas Morse Review

Ed Davey Excerpts

Thursday 19th March 2020 Commons Chamber

[Mr David Davis (Haltemprice and Howden) (Con)]

I beg to move,

That this House believes that the Loan Charge is an unjust and retrospective tax; notes that the law on the Loan Charge was not settled until 2017; and calls on HMRC to cease action on loans paid before 2017.

The motion is in my name and those of the hon. Member for Brentford and Isleworth (Ruth Cadbury) and my right hon. Friend the Member for New Forest East (Dr Lewis), and is supported by some 40 other Members of the House.

I start by commending my right hon. Friend the Member for New Forest West (Sir Desmond Swayne) for having the courage to beat me to the punch in this particular debate. It may seem strange to outside observers that in the midst of a global pandemic and a huge national crisis that we are talking about a tax technicality—at least, that is how it might appear. But actually it is one of the great virtues of our country that no matter what the crisis, whether it is a pandemic or warfare, the House always pays attention to issues of natural justice. We never ignore issues of natural justice, even in times of crisis. As a matter of justice, which this is, it is not a party political issue. In politics and our business, justice is a matter of honour that we deliver to the British people, and that is what we intend to do today.

The loan charge is an injustice with very large consequences. We have all met and listened to constituents who are facing utter financial ruin as a result of this policy. It is ruining people’s lives. There have been at least seven suicides caused by the stress, anxiety and financial hardship of this policy. To give the House a flavour of that—because it does not apply just to those who have committed suicide but to those who are under stress—here is what the family of one loan charge victim told the all-party group about his suicide note:

“He wrote about being at the end of his tether with the Loan Charge matter. He wrote such awful things about himself things that just weren’t true, that he clearly thought about himself at the time. He wrote that he did not set out to do such wrongdoings; he wrote about being unable to speak to his GP about his anxiety as he was ashamed, his fear of going to prison, his disgust in himself for getting mixed up in the Loan Charge and his belief that he would now go to hell.”

In the case of this individual, the loan charge policy took not just his money, but his self-respect and eventually his life. And there could be more. According to the loan charge all-party group, 39% of those affected have had suicidal thoughts. I think the Minister will be hard pushed to think of another Government policy that has caused more than a third of those affected to consider suicide. It is no surprise that it is having that effect on people. Some 68% have suffered depression, 71% face bankruptcy, and 49% could lose their homes. I said in the previous debate on this issue that the power to tax has the power to destroy, and that has never been more clearly demonstrated than here.

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

I congratulate the right hon. Gentleman on bringing this debate to the House. In the all-party loan charge group, we took evidence from a number of family members of people who had committed suicide as a result of the loan charge, and I can underline the point that he is making. The impact on people who had been law-abiding and hard-working throughout their lives has been quite traumatic. In a particular case that I remember—I am sure that the hon. Member for Brentford and Isleworth (Ruth Cadbury) will remember this—the person who took his own life did not owe a huge amount of money. It was the fact that he had been made to feel like a criminal when he was anything but a criminal.

[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.

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[Mr Davis]

My right hon. Friend is absolutely right. I started by saying that this is not a political issue; it is an issue of honour. As we would expect from our House—one of the greatest Parliaments in the world, if not the greatest—all sides take part in defending that honour.

[Sir Edward Davey]

The intervention from the right hon. Member for New Forest East (Dr Lewis) was spot on: this has brought the House together. The issue is not about tax avoidance. I think everyone on both sides of the House agrees that tax avoidance should be clamped down on, and there is no disagreement that the loan charge could apply in the future. What has deeply concerned many of us is that this is an offence against the rule of law, which is supposed to be a basic British tradition—one of our core values, which is taught in our schools. I therefore totally agree with the points made by the right hon. Gentleman.

[Mr Davis]

I thank the right hon. Gentleman—I nearly called him my right hon. Friend, from my days on the Public Accounts Committee.

When financial advisers and accountants could not understand the law, when employers could not understand the law, and when the courts could not agree on the law until 2017, how could an ordinary layperson possibly have understood the law?

The Supreme Court’s eventual decision, overturning three decisions before it, reflects changing national attitudes on the responsibility of the taxpayer—the point the right hon. Gentleman has just lighted on. As a result, one organisation representing the professions involved explicitly changed its guidance to its members. It said:

“Members must not create, encourage or promote tax planning arrangements or structures that…set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or…are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”

In what year was that changed guidance handed out by the professions? 2017.

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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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[Jesse Norman]

I take it that the hon Gentleman rightly refers to the enablers and promoters of such schemes. As he knows, I take that extremely seriously, and I have insisted on that point ever since I became Financial Secretary. I will say more about that shortly.

I return to the point that such schemes were contrived tax avoidance schemes that were typically run through an offshore vehicle. A person would receive a monthly amount of pay, often deliberately set at or around the level of the personal allowance to maximise the tax avoided, and above the national insurance lower earnings limit, so as to qualify the person concerned for the national insurance contributions required to receive a state pension. Of course, that did not reflect the person in question’s true earnings because, alongside that payment, they would receive a further top-up payment described as a loan. In many cases, the top-up payment far exceeded—often by a large multiple—the salary element declared for tax purposes.



Those facts are not genuinely in doubt, and all Members who have taken part in the debate have rightly condemned tax avoidance, but I put them on the record again because they highlight how contrived that form of tax avoidance typically was. They also go to the root of the problem.

My right hon. Friend the Member for Haltemprice and Howden raised the issue of thesauruses and dictionary definitions. Let me remind him of the difference between a dictionary definition and a thesaurus. A thesaurus gives an alternate word of supposedly the same meaning. A dictionary definition tries to explain exactly what it is that is being talked about.

The dictionary definition of a real loan is,

“an amount of money that is borrowed…and has to be paid back”.

That accords with our natural experience, as hon. Members will discover if they try to take out a business loan from a bank and not pay it back. If they try to take out a mortgage and not pay it back, they will find the same to be true.

Those loans, however, were not designed to be paid back. They were rather different from loans that might be made to employees that then get written off, on which tax is typically chargeable. They were not designed to be paid back. They were employment income in disguise, so they were subject to tax.

[Sir Edward Davey]

Will the Minister set out which piece of legislation, before the loan charge legislation, saw loans as income?

[Jesse Norman]

I am not in a position to take the right hon. Gentleman through the legal arguments, and I do not need to, because, as I have said, they have been described in detail by Sir Amyas Morse in his review which, of course, is based, as my remarks would not be, on a detailed interrogation with tax experts on all the specific issues behind it. I do not think we have any sensible reason—no one has in fact offered one—for disagreeing at length or in any detail with his conclusion.