Loans Charge: Further issues to consider

Loans Charge: Further issues to consider

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You may have seen our recent article on the partial abolition and major changes to the disguised remuneration loans charge http://tridenttax.com/radical-reforms-to-the-2019-loan-charges-makes-for-a-happy-christmas-for-many/

As we await draft legislation and guidance from HMRC we have identified further issues that will need to be considered by taxpayers, their advisers and HMRC.

Will those who repaid loans to avoid the loans charge as an alternative to settlement by voluntary restitution be allowed to re-borrow?

Will amendments to the disguised remuneration legislation be made to ensure that refunds of voluntary restitution settlement don’t result in a new and separate tax charge being made because a taxable relevant step was taken by trustees or other lenders when writing off  loans following settlement with HMRC?

In cases where settlement was made by voluntary restitution and an inheritance tax exit charge was also paid on the loan write-off, will the IHT be refunded in addition to the tax?

There are cases where multiple tax years are involved and some of those years have been settled under voluntary restitution; will partial refunds be made?

There are also a number of less obvious aspects that arise directly or indirectly from the findings in the report of Sir Amyas Morse.

In some cases, taxpayers will have settled with HMRC rather than disputing the validity of Regulation 80 PAYE Determinations because they believed the alternative would be to pay tax under the loans charge. Neither the report of Sir Amyas Morse nor the initial guidance from HMRC comments on this and it seems unlikely that any concessional treatment will be available to allow those affected to look afresh at whether it would have been worthwhile to challenge the validity of the Regulation 80 Determinations.

However, if settlement is still under consideration and the loans charge will not apply as a backstop charge it may be worth re-assessing the position. For example, this might apply in the situation where a director was considering funding a company settlement because the company has insufficient funds.

If HMRC considers that the decision in Glasgow Rangers applies with the effect that contributions to the trust are redirected earnings, it is unlikely that the debt could be transferred to the individual. However, the individual may nevertheless have been prepared to fund the company settlement in the knowledge that the loans charge liability of the company could be transferred to them.

If the loans charge will no longer apply, the individual should re-assess their position and that of the company before deciding whether to settle and if so, on what terms.

Another effect of the reduction in scope of the loans charge may be that HMRC will alter its approach to cases where it has protected its position by issuing Regulation 80 PAYE Determinations. It is difficult to predict how things could change, but broadly, HMRC could decide to pursue these cases even more vigorously than before or it could take a more measured view and heed the criticisms levelled at HMRC in the Morse report.

If the Morse report is taken seriously, HMRC may decide to take a softer approach in the following situations:

  • Where it opened enquiries and/or made a protective assessment but has not made contact for several years
  • Where HMRC issued Regulation 80 Determinations more than 4 years after the end of the relevant tax year and, therefore, the validity of the Determinations relies on “careless behaviour”
  • Where HMRC is seeking penalties and the reason given is that the employer was careless by virtue of using a disguised remuneration scheme

However, even if HMRC does not proactively alter its approach when these features are present it will be worth considering whether arguments can be made to improve the taxpayer’s position.

We are also aware that many insolvency practitioners are now having to deal with disguised remuneration arrangements as part of their duties and it will also be interesting to see whether HMRC’s approach alters in this area in view of the findings in the Morse report.

Until the new legislation and HMRC guidance is published – and we hope and trust this is imminent – it will be difficult to provide any firm advice other than to delay committing to any course of action.

There are also individuals who did not settle with HMRC because the cost of the loan charge would have been lower than settling historic liabilities with HMRC.  Those individuals will be in the happy position of no longer being required to pay the charge. However, they will face questions about what to do with existing loans, the costs of maintaining trusts and the prospect of ongoing IHT charges. Careful thought will be required to understand the best way to deal with outstanding issues without creating further tax problems.

If you would like to discuss any of these issues please contact us.

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