A contractors’ group has launched a legal challenge against HMRC – on the basis that the forthcoming 2019 Loan Charge breaches the human rights of those targeted by the legislation.
In the past, thousands of individuals used Employment Benefit Trusts (EBT) as payment vehicles for their contract assignments. Users of such schemes were paid in the form of loans… which were never paid back – saving a great deal of tax in the process.
However, despite the fact that such schemes may have been legal at the time, The Finance (No.2) Act 2017 introduced powerful retrospective measures which allow HMRC to demand backdated taxes on users of these loan-based schemes. This could impact to 50,000 people and raise £3.2bn, according to Treasury estimates.
It is the retrospective element of the Loan Charge which has attracted so much criticism – the ICAEW, for example, says that any new legislation should be proportionate and fair. The tax body has noted the hardship that the Charge could cause and suggests that HMRC should have acted sooner to shut down such artificial arrangements.
The ICAEW stated that while those taxpayers who purposefully avoided tax “deserve little or no sympathy”, “…many were misled about the arrangements and would not have appreciated what they were doing. In their case, while their position needs to be regularised, we think they should not be so heavily penalised.”
The Loan Charge Action Group (LCAG) says that many of those targeted by HMRC unwittingly signed up to loan-based schemes, and notes that the promoters of such tax avoidance vehicles have not been targeted by the new legislation.
The group is launching a Judicial Review (JR) to challenge the implementation of the Loan Charge and has appointed tax specialist Robert Venables QC to take the case. The basis of the challenge will be on human rights grounds.
The High Court will be asked to hear two JR applications simultaneously, as there are separate loan charges for the self-employed and employed.
If the Court determines that the new legislation is incompatible with the European Convention on Human Rights, it can make a declaration to this effect, i.e.. that the new tax “is an infringement of your right to peaceful enjoyment.”
The JR will also ask for a declaration based on s.6 of the United Kingdom Human Rights Act 1998 – the argument would state that HMRC is not under an absolute obligation to collect the tax but has a statutory discretion whether or not to do so.
According to the group’s notes, an initial hearing could take place at the High Court in early 2019, and judgement “should be available before the end of September 2019.”
The legal action is expected to cost up to £1m, which includes funds to cover future appeals by either side.
You can read comprehensive notes on the JR process, and how to contribute on the LCAG website here.