That Bites: The 2019 Loan Charge and Human Rights
The 2019 Loan Charge
The 2019 Loan Charge was introduced by the Finance (No 2) Act 2017. The charge means that all employment related loans entered into on or after the 5th of April 1999 which remain ‘outstanding’ (i.e. no settlement agreement has been reached with HMRC) on the 5th April 2019 will be chargeable to tax as employment income in the 2018/2019 tax year.
Employment loans were most common in the late 1990s and early 2000s and the vast majority involved employers providing funds to employee benefit trusts (“EBTs”) that would then loan the money to the employee on the understanding that it would never need to be repaid.
In the Rangers case, the Supreme Court largely dismissed the effectiveness of these types of schemes and HMRC has since been using the decision to pursue unpaid tax and National Insurance.
According to the Treasury, the Loan Charge will affect around 50,000 people and be worth up to £3.2bn, and opinions are divided regarding the fairness of the charge. HMRC believes schemes such as EBTs never worked and the Loan Charge is necessary as it is unfair if avoidance scheme users escape paying their share of taxes. However, MPs, professional bodies, and those caught up in the schemes have criticised the charge for being retrospective in nature and have highlighted the life-changing impact it may have on taxpayers, such as bankruptcies and loss of homes.
Despite criticism, the position remains that the Loan Charge is in place, with no signs of the legislation being suspended.
The Loan Charge Action Group (“LCAG”) is leading a Judicial Review against the government’s plans on the basis that the Loan Charge is in contravention of the European Convention on Human Rights, arguing that it is disproportionate, retrospective, and unfair.
Article 1 of the First Protocol of the Convention requires that: ‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions’, but goes on to say that ‘the preceding provisions shall not . . . in any way impair the right of a State to . . . secure the payment of taxes’.
In light of this, the LCAG are likely to face several hurdles in their legal challenge:
- The importance of the public interest in securing taxes has been emphasised in a retrospectivity case called R (Huitson) v HMRC. The court stated although the retrospectivity of fiscal legislation is not prohibited as such, the critical point is the balancing of the community interest and individual rights. Therefore, retrospectivity may be permitted if pursuant to a justified fiscal policy.
- Whilst an individual should not be deprived of their possessions except where it is in the public interest, the government will be awarded a wide margin of appreciation. This is because the ECHR is an international treaty and therefore each member state is given this wide margin on the basis that the member state is in a better position to determine what is appropriate to regulate its domestic affairs.
- Although the ECHR ‘restricts’ Parliament’s power to pass retrospective legislation, the treaty itself is not binding. This means that although Parliament will take the treaty into account, it does not have to follow it. Furthermore, the Loan Charge is contained in primary legislation (an act of Parliament) and so it follows that its retrospectivity must have been intended by Parliament.
- Regarding, the Article 1, protocol 1 claim, there are limits to what Judicial Review can achieve. The courts may simply state that they believe Parliament to have intended to legislate in compliance with Human Rights if the provision can be read in this way or they may state that the Finance Act cannot be reconciled with Human Rights and therefore issue a declaration of incompatibility. However, this declaration is not a strike down power, and it would be still be within Parliament’s remit to review/change the Act.
The Clock is Ticking for Disguised Remuneration (5th September 2018)
Extra Time To Pay For Disguised Remuneration Users (2 August 2018)
Rangers v HMRC – EBT Struck Down by Supreme Court (27 July 2017)