The UK Government has announced significant changes to the design of the controversial Loan Charge, on individuals who have directly entered into disguised remuneration schemes.
The changes will reduce the scope of the Loan Charge, dulling its retroactive impact and cutting settlement costs for taxpayers.
The Loan Charge is intended to bring within the charge to tax tax-avoidance arrangements that enabled users to avoid income tax and national insurance contributions by taking salaries in the form of a loan. In reality, this loan would never be paid back.
Amid concerns from lobby groups and lawmakers as to whether the Loan Charge is lawful, the Government commissioned an independent review of the loan charge in September 2019. The review was due to conclude in mid-November. However, parliament was dissolved on 6 November 2019, ahead of the general election on 12 December 2019.
The new government responded to the findings of the review with the announcement of a package of changes on 20 December 2019. These newly announced changes are discussed here, along with previous guidance released for taxpayers.
The Loan Charge
The Loan Charge came into effect on 5 April 2019. When initially announced, the charge was to apply to all loans made since 6 April 1999, if they were still outstanding on 5 April 2019, and the recipient had not settled the tax due.
The Government had announced that, for those struggling to pay the tax due, there would be no time limits on how long payments could be spread out, with each case to be considered on individual circumstances.
Taxpayers' Responses to the Loan Charge
According to HMRC, taxpayers responded to the announcement of the Loan Charge in various ways. As of November 2019, some taxpayers had already settled their disguised remuneration loan scheme use and paid the amount they owed in full, while others had agreed a settlement and were paying in instalments.
Other taxpayers have chosen to wait to finalize their settlement with HMRC, pending the outcome of the government review and any related litigation, but had provided all the required information by 5 April 2019. Others had chosen not to settle their disguised remuneration loan scheme use and will, therefore, be liable to the Loan Charge.
November 2019 Guidance
Guidance was released by HM Revenue and Customs in November 2019. This guidance was intended to clarify what was expected of taxpayers pending the response from the Government to the review.
In this guidance, titled "Disguised remuneration: Loan charge review", HMRC had said that, despite the review, taxpayers should continue to meet their legal obligations. This includes reporting the Loan Charge on their tax return by 31 January 2020. Taxpayers would then be able to amend their 2018/19 tax return after the conclusion of the Government's review.
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Changes to the Loan Charge
On 20 December however, the Government set out a number of key changes to the Loan Charge, in response to the findings of the review.
Among key announcements are that the Loan Charge will apply only to outstanding loans made on, or after, 9 December 2010. This reduces the regime's retrospective application by more than eleven years. In addition, the Government said 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, by opening an enquiry).
The Government has said taxpayers can now elect to spread the amount of their outstanding loan balance (as at 5 April 2019, recalculated in line with the above changes) evenly across three tax years: 2018 to 2019, 2019 to 2020, and 2020 to 2021. The Government considers that this will give greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of tax.
Meanwhile, the Government is retaining the five- and seven-year payment period for those with no disposable assets and who earn less than £50,000, or £30,000, respectively. Taxpayers may request a longer period in which to settle their tax liability but they will need to provide HMRC with detailed financial information.
Loan Charge Refunds
HMRC has committed to refund voluntary payments (known as "voluntary restitution") already made that was included in a settlement agreement reached since March 2016 (when the Loan Charge was announced) for any tax years where:
- the Loan Charge no longer applies (loans made before 9 December 2010); or
- loans were made before 6 April 2016, and the avoidance scheme use was fully disclosed to HMRC and the department did not take action.
Taxpayers should note, however, that although changes to the Loan Charge have been announced, the existing rules remain in force. HMRC has said it will not be able to process any refunds until changes to the loan charge legislation have been enacted by Parliament. Draft legislation and more detailed guidance is to be published in early 2020, alongside a timetable for implementing the changes. HMRC expects the legislative amendments to become effective in summer 2020.
Taxpayers who have not filed their tax return, or agreed a settlement with HMRC, should submit a Self Assessment tax return for the 2018 to 2019 tax year. Typically this should be submitted by 31 January 2020, and should include a best estimate of the tax due. However, for Loan Charge taxpayers, HMRC has said a filing may be made by 30
September 2020, with HMRC stating that it will:
"waive penalties for late filing, late payment, and inaccuracies in respect of the loan charge entries in these returns."
Late payment interest will not be payable for the period 1 February 2020, to 30 September 2020, as long as a return is filed and tax is paid, or an arrangement is made with HMRC to do so, by 30 September 2020, the agency said.
Taxpayers should note that paying the Loan Charge does not resolve the underlying tax dispute with HMRC for the years in which loans were made. Tax years that are subject to an open enquiry or assessment will still need to be resolved, either by way of settlement with HMRC or through litigation, HMRC has said.
Disclaimer: The blog does not represent taxation or legal advice and that independent advice should always be sought in respect of such matters etc.