The UK tax authority, HM Revenue and Customs (HMRC), has released final guidance for taxpayers who entered into Disguised Remuneration schemes targeted by the UK's Loan Charge.Those taxpayers who have yet to finalise their settlement may be required to act before 30 September 2020.
Loan Charge Background
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. Within these Disguised Remuneration (DR) schemes, the loan would in reality never be paid back.
The Loan Charge is intended to apply only where a taxpayer fails to settle the tax owing under a DR scheme, where the loan was outstanding on 5 April 2019.
The Loan Charge's scope has been modified a number of times since it was first introduced in 2019, owing to concerns raised by lobby groups and lawmakers.
Originally, the Loan Charge was to apply to all loans made since 6 April 1999, if they remained outstanding on April 5, 2019, and the recipient had not settled the tax due.
The Government commissioned an independent review of the loan charge in September 2019, and thereafter announced a package of changes in December 2019.
Loan Charge Changes
The UK Government decided:
- The Loan Charge will apply only to outstanding loans made on, or after, December 9, 2010; and
- The Loan Charge will not apply to outstanding loans made in any tax years before April 6, 2016, where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, by opening an enquiry).
With the review complete and Finance Bill 2019-21 enacted, HMRC has now released two final guides, which describe the actions required by September 30, 2020, for taxpayers who used DR schemes, and the rules that will apply thereafter.
According to HMRC, taxpayers who used DR schemes will fall into one of five groups, depending on their circumstances, for whom a different response is required:
- Customers who have settled with HMRC and are not due a refund (for these taxpayers, no further action is needed in relation to the loan charge);
- Customers still engaging with HMRC on a settlement (action is required by September 30, 2020, to avoid the Loan Charge);
- Customers who have not settled and will pay the loan charge (these persons must file a 2018-19 tax return by September 30 and pay their 2018-19 liability in full or agree a time-to-pay arrangement);
- Customers who have settled and are due a refund or waiver following the independent review (HMRC intends to contact these persons); and
- Customers who no longer have to pay some, or all, of the loan charge but have not settled all of their use of DR schemes (for these taxpayers, HMRC has released guidance describing the settlement terms that will apply after September 30, 2020, which are explained below.)
Taxpayers who provided the necessary information about their scheme use by April 5, 2019, and who work with HMRC to conclude a settlement by September 30, 2020, will be able to settle under terms published in 2017 and keep clear of the Loan Charge. These terms will be withdrawn after September 30, 2020.
Settlement Terms After 30 September 2020
According to HMRC, the newly released 2020 settlement terms include the following main features:
- customers agree to pay Income Tax, National Insurance contributions, late payment interest, and, where relevant, Inheritance Tax charges; and
- penalties for making an inaccurate Self Assessment return will only be charged on an exceptional basis for years up to 2018 to 2019.
According to HMRC, the main differences with the 2017 terms are:
- All statutory late payment interest must be paid;
- Tax will be charged where a director's settlement liability is paid voluntarily by the employer company, and the director does not 'make good' the tax charge;
- For corporate employers, Corporation Tax relief on Income Tax and National Insurance contributions included within settlements will be allowed at a later date than under the 2017 terms; and
- Corporation Tax relief for any contributions into arrangements such as an employee benefit trust made on or after April 1, 2017, may also be restricted to a later date or denied, because the law was amended from this date.
- UK Set To Expand Making Tax Digital
- UK Government Agrees To Ease Loan Charge Rules
- Irish Revenue Releases Guidance On 'Hybrid Mismatches'
- US Tax Residency Guidance For Those Stranded As A Result Of COVID-19
Disclaimer: The blog does not represent taxation or legal advice and that independent advice should always be sought in respect of such matters etc.