MPs pass motion calling for independent review of loan charge

Two Conservative former cabinet ministers called for a ‘root-and-branch review’ of HMRC during the debate.

However, the Financial Secretary defended the government's stance, saying the avoidance schemes in question were never legitimate and that the 2019 Morse Review had been both independent and had seen 19 of its 20 recommendations adopted.

The motion agreed by MPs can be said to be the opinion of the House of Commons but does not have legislative force and is non-binding on the government. It reads –

“That this House is deeply concerned that HMRC has confirmed the suicides of 10 people facing the Loan Charge and that, despite the Morse Review, thousands face unaffordable demands, with the risk of further suicides; notes that HMRC has also confirmed 24 cases of serious harm, including 13 suicide attempts; believes that many people who used schemes were victims of mis-selling, and that in other cases employers and agencies pushed people into using them, yet HMRC is demanding all disputed tax from scheme users, not from those who recommended, promoted and operated the schemes; further notes that section 44 of the Income Tax (Earnings and Pensions) Act 2003 deems agency workers to be taxable as employees of those agencies and that HMRC should have collected tax from agencies at the time; criticises HMRC transferring the liability to individuals despite its own failures; observes that HMRC is pursuing open enquiries for schemes before 2011 despite the Morse Review; also notes that HMRC is seeking additional payments from those who settled; further believes that the Morse Review was limited and not genuinely independent of HM Treasury and HMRC; highlights the resolution proposed by tax professionals; calls on the Government to work with all parties to find a fair resolution and for a full independent investigation, including into the conduct of HMRC; and believes that taxpayer rights must be enshrined in law and enquiries closed after four years if HMRC fails to act”.

The debate was opened by DUP MP Sammy Wilson, like most of the other contributors a member of the loan charge and taxpayer fairness all-party parliamentary group.

Wilson likened the way the loan charge had been dealt with to the Horizon scandal at the Post Office. “I do not think that I am being overdramatic when I say this—that we are looking at another Horizon scandal, and the parallels are frightening”. These included, he said, suicides linked to the actions of a government department, that ministers had ‘turned a blind eye’ to the issue for years, and that public officials – and ministers on their advice – had tried to convince MPs and campaigners that those affected were bad people.

Wilson accused HMRC of going after ‘easy targets’ rather than promoters who have made hundreds of millions of pounds from schemes. He asked the minister to explain: “if these schemes are designed as contrived ways of avoiding tax, why is HMRC not pursuing even some of the new promoters who are establishing themselves today and who will have disappeared by tomorrow, once it is seen that their schemes are being challenged”.

The Northern Irish MP said that there should have been more supervision within HMRC of what was going on. “For years, people were acting in the belief that they were legitimate and were no risk. And here is the ultimate irony: HMRC employed people on contracts to do work for it, knowing that those people were being paid in that way, and never challenged it.”

Many people were ‘forced’ into these schemes and believed that they were employed by a contractor and their tax being deducted, said Wilson. 93% of those in the schemes were assured that there was no risk and that they were compliant, he continued.

Wilson posed a couple of questions to the minister, including whether HMRC officials, just as Post Office officials were, are on commission for the money that they bring in through the loan charge, and if he would challenge his department’s lines on this matter. He asked the loan charge to be repealed and for employers and promoters to be pursued.

Finally, Wilson concluded with a call for a bill of rights for taxpayers, and for tax fairness to be built into legislation.

Wilson took a number of interventions during his speech. A running theme was what MPs saw as HMRC’s failure to pursue the promoters and enablers of avoidance schemes.

Wera Hobhouse (Lib Dem) said that people who “absolutely knew what they were doing are getting away scot-free”.

Shadow Treasury minister Tan Dhesi (Lab) wondered why HMRC " have not actively pursued the architects and promoters of the scheme, rather than the victims who have been led into the schemes”.

Gavin Newlands (SNP) thought the ‘simple truth’ was that HMRC had failed to police this issue. “Many people made HMRC aware of their involvement in the schemes and it took HMRC years to get back to them or even to look into the issue.”

Sir Robert Buckland (Con), a former Lord Chancellor, described regulation of promoters as ‘an ungoverned space’. “Surely, as they are trying to sell financial service products, they should at least come under the control of the Financial Conduct Authority”, he said.

Ashley Dalton (Lab), endorsed the motion’s call for an independent inquiry to look into this issue.

The second speech in the debate came from Greg Smith (Con), Co-chair of the loan charge all-party group. Smith highlighted the scale of the loan charge, saying that approximately 60,000 people have been affected by it the loan charge and that the scheme has brought with it “a train of despair and destruction that should weigh heavily on HMRC and all of us in this House”.

Like Wilson, Smith saw similarities between loan charge and the Horizon Post Office scandal. He asked “how can a body of the state be autonomous in being judge, jury and executioner at the same time” (HMRC in the case of the loan charge scandal). He called for ‘checks and balances’ to be built into HMRC if “we are to see justice for the loan charge victims”.

Drew Hendry (SNP) intervened on Smith to ask him if he agreed that it is scandalous that “none of those agencies has been pursued by HMRC for their part in this”. Smith agreed, saying that it is ‘outrageous’ that promoters have not been pursued.

“Does my hon. Friend agree that protecting the coffers of the state should never take precedence over protecting the lives of our constituents”, asked Dean Russell (Con) in another intervention. Smith agreed.

In a further intervention Wera Hobhouse highlighted the importance of proper transparency in how government bodies operate and said the regular occurring of these problems ‘undermines trust in government’.

Gerald Jones (Lab), another member of the loan charge all-party group, said that the government’s approach has meant that “ordinary people who were victims of mis-selling are facing huge bills, which is causing them untold distress and personal harm”.

Jones noted his party’s ask for a ‘fair and effective’ approach from HMRC instead of the existing one and stated that “the 2019 Morse review cannot be the final word on this matter”.

Jones said he shared the view of others in the all-party group that the tax burden should not fall only on the individual users of the schemes, but “should be shared by the employers and agencies and also, ideally and appropriately, the operators and promoters of the schemes”. He urged the government to take action and announce ‘a fairer approach’.

The former Secretary of State for Work and Pension, Sir Iain Duncan Smith (Con), largely focused his remarks on what he sees as a lack of accountability at HMRC. Describing it as a “peculiar” department he argued that the “the backdrop to this issue is that HMRC operates almost with impunity”.

He continued: “I have seen Ministers come and go at the Dispatch Box who are told one thing by HMRC, leave their position and then come back and say, “I did not know half of the stuff that was going on.” I simply say that there is a problem with HMRC.” He added that “HMRC is protected by the Treasury”.

Duncan Smith contended that HMRC “cannot justify the legal basis for pursuing individuals and not going after those who promoted the schemes”. He gave an example of one of his constituents who has been facing mental stress due to a nine years battle with HMRC over the loan charge and highlighted that “people deserve a process that is better, fairer, open and reasonable and that goes after those who originally promoted the schemes”.

He ended his remarks by saying that: “I hope the Government will now recognise that we do not want to see a repeat of what happened with the Post Office scandal as a result of HMRC’s bad behaviour.”

Earlier, former Lord Chancellor Sir Robert Buckland had intervened on Duncan Smith to offer his view that HMRC needs to be reformed. “It was the product of a forced merger of the Inland Revenue and Her Majesty’s Customs and Excise… The merger was rushed… and HMRC has never enjoyed the proper scrutiny and ministerial involvement that it should have received. Does my right hon. Friend agree that now is the time for a root-and-branch review and a change to the nature of HMRC—retaining its independent functions, of course, but allowing for greater ministerial oversight?” Duncan Smith agreed.

Sarah Green (Lib Dem), like most of the other speakers in the debate, raised the cases of constituents to illustrate the “truly harrowing picture of the impact this unfair charge is having”. Like Duncan Smith she thought there had been ‘direct interference’ from both HMRC in the Morse review.

Making the case for “far greater transparency from HMRC and the Treasury” Green ended by drawing attention to a constituent who had successfully overturned the Information Commissioner’s decision to allow the Treasury not to release the final draft of the loan charge review. “The original freedom of information request was made in December 2020, yet over three years later the material has still not been released.”

Sir Desmond Swayne (Con) described the loan charge as “a measure that cries foul against every tenet of proper legislation with, first, its retrospective aspect, and secondly, its taking away from our constituents the right to appeal to a tribunal with an administrative or quasi-judicial process to have their case fairly considered. It made HMRC both judge and jury in their case—and what a judge and jury it turned out to be!”

He concluded: “[U]ltimately this will reach the public consciousness — we may even have our own TV drama… and when it does… we will rue the day that we did not take the action when we could.”

John McNally (SNP) was another MP who likened this to the Post Office scandal. “What is really vexatious and concerning is that HMRC continues to hoodwink MPs into believing that it is going after the promoters who put the workers into this abominable position, when we all know it is not doing so.”

McNally joined others in calling for an independent review to deal with this matter. He said that it is not acceptable “to continue to hound ordinary workers with no rights or funds for legal defence against such a powerful government body as HMRC”.

Sara Britcliffe (Con) emphasised that law on tax should be knowable and accessible to the people to which it applies and said that loan charge schemes were mis-sold by hiring agencies. She described one of her constituents’ loan charge case, arguing that, “HMRC cannot have the power to suddenly request tens of thousands of pounds from individuals, appear to drop a case and then revive it on a whim, without any explanation at all”. She urged the government to act immediately.

Former minister Paul Scully (Con) said this was “a really good example of why retrospective policy is not a good idea”. Describing HMRC’s investigatory powers as outstripping those of policemen, proportionately, he said it should be “going after the practitioners and promoters of these schemes, which it can do under the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 that I passed a few years ago”.

“HMRC has persisted and acted as judge, jury and executioner with a ruthlessness that I cannot believe” said Neale Hanvey (Alba).  He questioned why HMRC had pursued loan charge customers for the full tax amount, including interest, penalties, and inheritance tax, despite already exceeding the expected revenue from employer. Additionally, he wondered why HMRC is still pursuing customers with loans from before December 2010 “given that Morse already pardoned those with no open inquiries on the basis that the law was not clear”.

A former Secretary of State for Business, Energy and industrial Strategy, Sir Jacob Rees-Mogg (Con) described this as “a classic example of the state abusing its power through aggressive tax collection”. Given HMRC has employed people using these schemes, he continued, “we are saying either that HMRC is so incompetent that it has no idea about the basis on which it is employing people, or that actually, because it saved some money, it thought these schemes were licit.”

Rees-Mogg thought that HMRC has ‘extraordinary’ powers and blamed the merger of the Inland Revenue with Customs and Excise – the latter holding ‘extraordinary prerogative powers’ – for bringing “a much more aggressive culture to our tax system”. He asked the minister to handle this matter and “put HMRC in its box”.

Hannah Bardell (SNP) and Hywel Williams (Plaid Cymru) both stressed the duty of HMRC to take responsibility for the harm done by the loan charge. Williams called on the minister to ‘act quickly’.

Sir David Davis (Con), another former cabinet minister, agreed with other members’ comments and stated that: “Those at HMRC know they have done wrong, and they have known it for some time”. He also argued that the HMRC should go after the promoters, highlighting that they exacted 18% to 20% of the incomes of people in carrying out this scheme.

Davis said that the Public Accounts Committee is one body that should look at the HMRC’s documents. Discussing retrospective taxation, he stated that “our country does not believe that people who undertake behaviour that is not illegal at one point in time should be prosecuted if it becomes illegal in future…That applies in spades to taxes”.

Considering the next action, he asked members taking part in the debate to support his motion to ‘ban retrospective taxation’ and write to the Procedure Committee asking it to request the return of the amendment of the law resolution at the beginning of the Budget debate to enable such a motion to be proposed.

Kirsty Blackman (SNP) agreed with David that amendment of the law resolutions should be brought back, but thought it the responsibility of the government to make the change. Davis challenged this, saying the Procedure Committee can put it to the House and seek a backbench motion.

David Davis also used his speech to criticise HMRC over IR35. “IR35 is a disgrace… When a state organisation with infinite resources—actually, your tax money and mine—uses that power to overrule and reduce the ability of ordinary citizens to protect themselves, I am afraid it is behaving in a way similar to how countries behind the iron curtain used to behave.” Davis urged the minister speak with HMRC and come back to the Chamber and “give us the truth”.

John McDonnell (Lab), former Shadow Chancellor, advocated for an urgent and ‘truly’ independent review which would include compensation for those affected. “The review should look at where the compensation should come from. I think it should come not from from other taxpayers, but from a levy on those who promoted the schemes, and perhaps some elements of the finance and accountancy sector that were involved up to their necks, to be frank.”

McDonnell’s comments on HMRC were more nuanced than some. He said that while he agreed with much of the criticism of the department, HMRC has rightly come under pressure from both sides of the House to tackle tax avoidance and evasion. However, at the same time, “both parties have excelled in a Dutch auction to establish the extent to which HMRC’s staff levels can be cut”.

Addressing the staff reduction, McDonnell stated that: “According to my understanding, HMRC looked for short cuts and a way of meeting the demand for it to tackle tax avoidance and evasion and the tax gap, and I think that this was one of the short cuts that it invented… we need to understand that if we are to tackle this properly as an institutional failing”.

The former Shadow Chancellor also expressed regret that in 2017 the loan change amendment was not considered properly. He wished that the implications of the amendment had been drawn to the attention of the whole House, saying: “The impression given was that this would be focused on a small number of “hard case” tax avoiders or evaders, and their scheme promoters.”

Duncan Baker (Con) described a constituent’s case, saying they fell into a loan scheme on the advice of tax professionals as a means to be clear of and compliant with IR35. As HMRC is treating the loans as both income and loans to the individual’s estate, his constituent is now having to pay income tax and inheritance tax on the amounts.

Baker emphasised that those who used the loan charge schemes were not tax professionals and the scheme was “simply mis-sold to people”. He said that we should “scrap or, at the very least, extend the residual tax waiver, which has been thoroughly unjust time and again”.

Jim Shannon (SNP) asked the minister: “how it is possible for HMRC to investigate individuals for unpaid taxes going as far back as 20 years, given that its limit for holding information on taxpayers is only seven years.” Arguing that the loan charge policy is ‘unjust and unworkable’, he said that this ‘retrospective tax’ violates the principle of legal certainty and the rule of law.

Wera Hobhouse said that the loan charge has not achieved its intention, concluding: “We urgently need a genuinely independent review of the whole loan charge, and a fair and final resolution for all”.

SNP spokesperson Kirsty Blackman described the situation as “an absolute mess”. She said that the House should ‘redouble’ their efforts and make sure that promoters are prosecuted. She argued that the minister needs to consider each individual case, not only look at this issue as a whole. “This needs to end, so we need to get a resolution for individuals or for the whole group”, she said.

Blackman also warned that new schemes are springing up, “taking advantage of people who are caught up in the loan charge scandal. People are being told, “Oh, you’re involved in the loan charge stuff—I can help you with that.” The person offering the help is then taking their money and running for the hills. That is still happening today, but those folk and those organisations are not facing any sanctions for their behaviour. The government need to ensure they are taking action.”

Darren Jones, Shadow Chief Secretary to the Treasury, spoke for Labour. He argued that HMRC’s approach to the loan charge “means that the government have failed in ensuring [their] duty of fairness”. He highlighted the 10 reported suicides and said that families are now grieving due to “an administrative approach to tax collection”.

Jones repeated the actions that the Labour Party has taken in respect of this matter, including the clause that the party tabled to the Finance (No.2) Bill in 2021. This would have required the Chancellor to commission an independent review to consider HMRC’s approach to the loan charge scheme and make recommendations on how it should be altered. Such a review would have offered a way forward, but unfortunately the government dismissed the proposal, he said.

The shadow minister asked the minister whether he would agree to commission a further independent review. “Such a review could consider the approach of HMRC towards the ordinary people caught up in the loan charge schemes and further consider what action should be taken against the architects and promoters of those schemes”, he argued.

“Will the Treasury use this moment today to finally agree to commission a further truly independent review,” Jones asked the minister. “Such a review could consider the approach of HMRC towards the ordinary people caught up in the loan charge schemes and further consider what action should be taken against the architects and promoters of those schemes.”

The Financial Secretary to the Treasury (FST), Nigel Huddleston, responded to the debate for the government. He acknowledged that he would not be able to satisfy all members, as he believed the government has ‘taken the right approach’.

Responding to a question posed in the debate, the FST said he had had discussions and conversations with Jim Harra, the chief executive of HMRC, in the light of the Post Office scandal, “about whether there are commissions or perverse incentives for people that may lead to distorting behaviour, and I have been reassured that there are not.”

Giving a brief history of the loan charge, the FST said that disguised remuneration schemes are ‘contrived tax avoidance arrangements’ that seek to avoid income and national insurance income. He said that once the government noticed that schemes were inappropriate, they took action and that HMRC had “opened thousands of inquiries into their use and challenged their operation through the courts”.

The FST continued that: “The schemes were never legitimate… always tax avoidance, and therefore there was always a clear path that tax was owed”. In response to an intervention, he added that individuals have a personal responsibility to check their tax affairs and the early stages of loan schemes involved the very wealthy and people who “knew exactly what they were doing”.

The FST reassured members that “where possible, HMRC has been seeking that tax from the employer in the first instance” and repeated that 80% of the revenue collected to date has come from employers.

The FST acknowledged that the way in which “we recover tax owed is important” and recognised areas where the impact of the original loan charge was disproportionate to its aims. He highlighted that he has had conversations with HMRC about the tone of their communication with impacted individuals.

The FST explained changes in the government’s approach since the Morse review. The government accepted 19 out of 20 of Morse’s recommendations which benefited about 30,000 people. This meant that “the loan charge would apply only to outstanding loans made on or after 9 December 2010, rather than April 1999”. The minister added that the loan charge would also not apply to outstanding loans made in any tax years before 6 April 2016. However, “Lord Morse was clear that the loan charge was necessary and in the public interest, and should remain in force.”

Responding to another intervention, the minister defended the independence of the Morse review. He said it had followed the normal process for such reviews and was “thorough and significant”.

Addressing the comments about tackling promoters, the FST explained that the government has prioritised this and has given HMRC additional powers to do so, including the power to publish details of promoters of avoidance schemes. Additionally, the government sought input during the summer on addressing non-compliance in the umbrella company market. This consultation, which included strategies for dealing with discussed schemes, will be addressed in the future.

Closing his remarks, the FST assured members that the government and HMRC are taking this matter very seriously and understand the distress that loan scheme users may feel when faced with large tax bills on their earnings. He explained that he has raised these concerns with HMRC officials and will continue to ask them to “adopt a more understanding tone”. Additionally, he noted that it is important to highlight that there is an appeals process.

He thanked all members for their input and encouraged those who still have disguised remuneration or loan charge liabilities to engage with HMRC.

In a short wind-up speech, Sammy Wilson hoped “that we will not be sitting here in four years’ time finding out that, although we had this debate, we heard platitudes from the Minister and there was no action”.

You can read the full debate here.

NB. There is more about the history of the loan charge in our explainer:  The Loan Charge - an explainer. However please note this has not been updated since September 2019.