DOES THE LOAN CHARGE LEGISLATION BREACH EUROPEAN UNION LAW?
By Richard Clayton QC
Three members of Exchequer Chambers are instructed in a fundamental challenge to the Loan Charge legislation launched this week. About 40,000 taxpayers are affected.
Judicial review proceedings (R (Hauret) v HMRC ), have commenced in England (involving Richard and Andrew). David is instructed in similar case in Scotland.
The proceedings say that the Loan Charge legislation in a disproportionate interference with the fundamental right to freedom of movement of capital under European Union law. Although the UK leaves the European Union on 31 December 2020, EU rights until then have been preserved by the European Union (Withdrawal) Act 2018.
The Loan Charge legislation, itself, concerns taxing what HMRC describes as “disguised remuneration loan schemes” where taxpayers “receive payment for work or services in the form of a loan or other form of credit in a way that means it is unlikely to be repaid.” In 2017 the Loan Charge legislation was introduced so that loans or credits received on or after 9 December 2010 and still outstanding on 5 April 2019 immediately became liable to tax.
In fact, HMRC have tried to argue that the loans made under various disguised remuneration schemes were always taxable, but have never persuaded any court that they are correct. Consequently, Schedules 11 and 12 of the Finance (No. 2) Act 2017 were enacted to make Loan Charges taxable- for both employees and the self-employed. The planned legislation was extremely controversial and in September 2019 the Government set up an independent Review, chaired by an accountant, Sir Amyas Morse. His report was critical of the proposals which were, therefore, changed.
Profound concerns were next expressed by the Loan Charge All-Party Parliamentary Group, an official Parliamentary Group comprising of Parliamentarians of all parties from both Houses of Parliament. They published two negative reports in April 2019 and in March 2020.
Subsequently, cases were brought alleging that the Loan Charge legislation breached the Human Rights Act . They are now under appeal to the Court of Appeal. Andrew and Richard are instructed in R (Zeeman) v HMRC.
But the EU complaint is very different from that made under the Human Rights Act. EU law takes precedence over domestic legislation and trumps it-and freedom of movement of capital is one of the four fundamental freedoms of the EU, like free movement of goods, people and services.
Many affected by the Loan Charge legislation obtained loans from the Isle of Man and the Channel Islands. These cross-border loans are transactions that entail restrictions on movement of capital.
The claimants accept that the Loan Charge legislation prevents aggressive tax avoidance and evasion and that this is a legitimate aim. But, they argue, interferences imposed by the 2017 Act are not proportionate. The 2017 Act goes too far.
In R (Lumsdon) v Legal Services Board the Supreme Court examined the proportionality principle under EU law. The Supreme Court emphasised that proportionality under EU law was entirely different from that human rights. More fundamentally, interferences with the fundamental freedoms guaranteed by EU Treaties require very strict scrutiny.
The claimants argue that the Loan Charge legislation is disproportionate for many reasons. The 2017 Act imposes a retrospective tax charge, it is too broad in scope (since it covers people not engaged in tax avoidance) and alternative measures are available, which are more targeted, less onerous and equally as effective in preventing tax avoidance. The future progress of R (Hauret) v HMRC will, therefore, be closely watched.