Rory Mullan comments on Loan Charge decision
Rory Mullan comments on Loan Charge decision
Mrs Justice Andrews today handed down judgement in Zeeman and Murphy v HMRC  EWHC 794 (Admin), dismissing both Claimants’ claims that the 2019 Loan Charge legislation brought in by the Finance (No 2) Act 2017 is an disproportionate interference with their human rights under Article 1 of Protocol 1 to the European Convention of Human Rights (‘A1P1’).
The Claimants, both represented by Robert Venables QC and Ross Birkbeck of Old Square Tax Chambers, brought their claims in a representative capacity, and were backed by the Loan Charge Action Group, an organisation representing taxpayers caught by the Loan Charges. Mr Zeeman was subject to the charge under Schedule 11 Finance (No 2) Act 2017 which targeted employee schemes; Mr Murphy was subject to the charge under Schedule 12, which targeted self-employed contractors.
Both sought a declaration that the legislation was incompatible with their human rights. Principally this was because of the retrospective effect of the charges, which in substance taxed loans made up to 20 years ago – an aspect of them that was not denied at the hearing and was accepted by the Judge. They also, however, argued that there are many other aspects of the legislation that are hard to justify, from the way that tax on outstanding loans is grouped together into one year and so charged at higher rates, to the artificial restrictions on repaying loans, and the fact that even if loans are later repaid the tax is not recoverable. Taken together with the retrospectivity, the Claimants argued that it was not proportionate for Parliament to enact this legislation in this way.
Mrs Justice Andrews found that there the legislation was not incompatible with the Claimants’ rights. This was ultimately on two grounds: that A1P1 did not apply to the charges at all; and that even if it did Parliament’s discretion to enact legislation is broad enough to cover the measures. On the first of these the Judge made two findings that are particularly notable.
Firstly, she concluded that the loans that were the subject of the Loan Charge were already taxable as employment income, on the full capital amount lent, when they were made. This was based on an expanded reading of the Supreme Court’s Rangers decision which is difficult to justify. She considered that the Supreme Court’s analysis applied not only to the payments into a trust, as in that case, but also to payments out. This is surprising given that argument had been rejected at First-tier and Upper Tribunal level in that case and was not pursued before or addressed by the Supreme Court.
The consequence of this conclusion was that first time a UK Court has held that the obligation to repay a loan is to be ignored for tax purposes. Although that is on the basis that such loans were in return for employment the same is true of loans within the taxable cheap loans regime. It appeared to be accepted that some such loans would not be remuneration but the distinction was neither addressed nor explained.
Secondly, the Judge adopted the reasoning of Vos LJ in St Matthews West / AVPCO, finding that A1P1 was not engaged at all because, in light of the above, the Claimants’ money was impressed with a claim by HMRC which prevented it being, in some sense, their money at all. McCombe LJ’s doubts in Rowe were dismissed.
This part of the judgment did not address the situation where HMRC were out of time to make an assessment at the date of loan charge. It is not clear, however, whether the reasoning could apply in those circumstances given the longstanding distinction between liability and assessment.
As regards the proportionality of the measures, Andrews J was unsympathetic and accepted the need for legislation particularly in the light of HMRC’s concern as to the continuing use of loans. It might be open to question as to whether a concern as to the use of loans today justifies a charge on a loan made 20 years ago and in relation to which HMRC are out of time to impose an assessment. It is unfortunate that the judgment does not provide a clear answer to that.
The final outcome reflects a lack of sympathy for the taxpayers position. Ultimately, the judge was satisfied that they should have paid tax previously (although the reading of Rangers is open to question) and considered that whatever steps were now taken to collect that tax now were justified. The conclusions followed from that.
As regards the scope of A1P1 the conclusion that the state demanding money based on events which took place years ago is not an interference with possessions is not an intuitive one. It is not surprising that Andrews J was consistent with her analysis in St Matthews but the approach does raise considerable confusion as to the scope of the protection.
It is not known if the taxpayers will appeal.