12 11 2018

Contractors facing huge tax bill launch legal action against HMRC alleging human rights breach

The tax office has admitted that it anticipates that some people 'will become insolvent as a result' of its new loan charge

The government is facing legal action over its attempt to collect billions in back taxes from contractors it accuses of tax avoidance, with activists seeking a judicial review of the controversial new loan charge on the grounds that it breaks human rights law, the Independent can reveal.

Thousands of UK contractors, including doctors, dentists and IT workers, are at risk of bankruptcy after HMRC introduced stringent new retrospective rules around tax schemes used by freelancers in the past.

In the 2017 Budget, Chancellor Philip Hammond introduced a loan charge, aimed at recovering taxes that were not paid by people who used ‘disguised remuneration schemes’, also known as ‘employment umbrellas’.

These arrangement enable freelancers to be paid through ‘loans’ in what was seen as a legitimate way to reduce income tax.

However, with the loan charge due in April next year, thousands of people are now facing a ‘life-changing’ tax bill.

HMRC said its plans are expected to affect up to 50,000 people and the loan charge is expected to raise £3.2bn.

The Loan Charge Action Group (LCAG), which is leading the legal challenge, represents more than 1,600 of those affected.

The group told the Independent that many of its members are “facing life-changing bills, loss of their home and bankruptcy”. In a survey of 500 members, the LCAG found 68 per cent are suffering from depression and anxiety, while 39 per cent have reported suicidal thoughts.

The tax office has acknowledged that some people will be unable to repay the loans, agree a settlement with HMRC or pay the loan charge that will arise on 5 April 2019, and has also said it “anticipates that some of these individuals will become insolvent as a result”.

According to the LCAG, neither the Treasury nor HMRC carried out a proper impact assessment of the consequences of the loan charge.

The LCAG has appointed Robert Venables QC, a specialist in tax law, to take the case.

Mr Venables said: “The loan charges involve an unjustified interference to the peaceful enjoyment of property. The interference is unjustified in that it is disproportionate to any legitimate aim which is being pursued.

“The loan charges are being applied in cases where there was no tax avoidance in the first place and taxpayers are being taxed on non-existent benefits and non-existent income. This is to all intents and purposes retrospective legislation. It is grossly unfair, arbitrary, oppressive and unjust.”

He added that he believes the LCAG has “good prospects of success” in challenging the loan charges under the Human Rights Act.

Richard Horsley, spokesperson for the LCAG, said: “We firmly believe that the loan charges are not only ill-considered, but that they run contrary to the principles of natural justice. Hardworking law-abiding people and their families face losing everything due to this unfair retrospective draconian tax grab.”

Mr Horsley said the LCAG had been dealing with “many desperate self-employed and formerly self-employed people who never broke the law and never sought to conceal their tax arrangements”.

He added: “No wonder the Treasury have declined to reveal the human rights impact and it is time we challenged this grossly unfair policy, which if it goes through will ruin and even cost lives.”

HMRC had no comment to offer.