The government has announced a significant overhaul of the 2019 loan charge following a much publicised review by Sir Amyas Morse. It will have huge consequences for individuals and employers who either faced the prospect of massive tax bills in the New Year or some who have already paid tax to HMRC in respect of historic liabilities to avoid a worse tax bill if the loan charge applied. We have set out the changes below.
The 2019 loan charge has been discussed at length in our earlier newsletters. Broadly, it is a charge on loans made to employees through tax avoidance arrangements, typically employee benefit trusts, that were not otherwise be charged to tax as income in the past. The loan charge was initially designed to be wide ranging and applied to any outstanding loans made after 5 April 1999. The result was a significant number of individuals were facing a tax liability for loans that related to employment income from many years ago.
The major changes are as follows:
• the loan charge will apply only to outstanding loans made on, or after, 9 December 2010
• the loan charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, opening an enquiry)
• HMRC will refund payments made where settlement was made by voluntary restitution where the loans in question were made before 9 December 2010 and loans made up to 5 April 2016 where the loan was fully disclosed to HMRC but no enquiry was opened
• Where the loans charge will still apply, there are changes on time to pay arrangements and a new measure to spread the taxation of the loans charge over 3 separate tax years
• There will be no penalties charged where loans are not disclosed in 2018/19 personal tax returns
These changes follow recommendations made by the House of Lords. The first change reference the date on which HMRC announced significant new provisions to prevent the payment of income or benefits through third parties like EBTs; known as the disguised remuneration rules. The logic for this change is to presumably recognise that from this date, HMRC made clear its intention to change the way in which loan arrangements via third parties would be taxed. Those that went ahead with such a loan did so in the knowledge that they were going against the new law and practice for taxing employment loan from third parties.
The second change is an issue that was central to the complaints made by people in contractor loan schemes. They argued that they fully disclosed how they were being paid, declared that they were using tax avoidance planning and were taxed on loans as benefits. HMRC often did not challenge these arrangements but the loan charge effectively allowed it a second bite of the cherry that made up for earlier failure or deficiencies on HMRC’s part.
HMRC has said that it will repay on request those who has settled earlier years in this way on a voluntary basis and would not have been required to pay the loan charge under the new rules.
HMRC has also offered standard terms for spreading the effect of the loan charge for those still caught. People can now elect to spread the amount of their outstanding loan balance (as at 5 April 2019) evenly across 3 tax years: 2018/19 to 2020/21. There are many who have significant loan balances that were built up over years that would have been taxed in one single 2019 loan charge with the result that they wold be required to pay more than if the loans were taxed when they were made e.g. because significant amounts of income would now be taxed at the top rate of 45%. The election will allow the income to be spread so that more basic rate, higher rate band income can be used over a three year period with the effect of limiting the potentially negative effect of taxing loans in one year.
HMRC has also repeated the offers to help people spread the burden of the loan charge over time: if you do not have disposable assets and earn less than £50,000, HMRC will agree Time to Pay arrangements for a minimum of 5 years. If you earn less than £30,000, HMRC will agree a minimum of 7 years to pay and they have also said there is no maximum time limit for a Time to Pay arrangement
The change of approach is going to require changes to the legislation. That will happen next year, but it will mean that repayments will not be made until the summer of 2020. HMRC appears to be saying that it will write to taxpayers to advise them of potential repayments or if the loan charge is still due. HMRC face a mountain of work to unpick previous settlement to understand which were wholly or partly voluntary settlement. We suggest that this is too important to leave to HMRC. Anyone who thinks they may have settled any historic liabilities voluntarily or may still be required to pay the loan charge should check their position as soon as possible.
For example, what will happen in those cases where settlement was made by voluntary restitution and the trustees then forgave the loan, in the knowledge that although this was a relevant step no tax was payable because its value was reduced to zero as a result of the settlement being reached?
Will HMRC be prepared to make refunds and accept no tax charge arises on the loan forgiveness?
No doubt many other questions will have to be considered in the context of each case.
HMRC have said that those who have not filed their tax return, or agreed a settlement with HMRC, should still submit a Self Assessment tax return for the 2018 to 2019 tax year. You can either submit by 31 January 2020, giving your best estimate of the tax due, or file by 30 September 2020. The extension of the filing deadline appears to be a generous concession but we need to understand the effect of pushing back the filing deadline for other income and gains included in a return in order to understand whether there are any consequences for filing by the later date e.g. will HMRC also suspend the 5% late payment penalty if income other than employment loans from a third party is involved?
There are many more issues for individuals and employers to work through e.g. those with open enquiries, instalment arrangement, employers who have reported through real time PAYE, etc. The HMRC website covers these but anyone affected should take advice if they are not clear on where they stand. www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review/guidance
An apology from HMRC?
Should HMRC apologise for the way it has pursued its recent policy. The HMRC website is silent in this regard but the Government’s response to the review is more reflective:
“HMRC is sorry some people who used DR avoidance schemes experienced delays and a fragmented experience from different parts of HMRC. HMRC are also concerned that some people considered the department’s approach towards them aggressive.”