Changes may affect 2018 to 2019 Self Assessment tax returns.
The government has now published the independent review of the loan charge policy and its implementation, undertaken by Sir Amyas Morse. It has also responded to this review and announced that it will make a variety of changes to the loan charge.
What is the loan charge?
The loan charge is an anti-avoidance measure, to address the tax loss to the Exchequer from a variety of ‘disguised remuneration’ schemes. Under such schemes, individuals were paid in the form of a loan or other payment from a third-party which is unlikely to ever be repaid.
Scheme providers devised remuneration loan arrangements with the aim of avoiding the need to pay Income Tax and National Insurance contributions. Many workers from differing professions including nurses, teachers, IT workers and cleaners were involved in such schemes, often following pressure from employers.
These were used by employers and individuals as well as contractors. Typically, these loans were provided not by the employer, but by a third party such as an ‘employee benefit trust’ funded by the employer and were structured in such a way that they were unlikely to ever be paid back.
The loan charge has come under criticism from the national press as well as cross-party objections from several MPs and Lords. Many believed it to be a retrospective legislation that undermines the rule of law. We posted an update on this in early December 2019, ahead of the publication of the review.
The review made several key recommendations (the full review, 83 pages long can be viewed here). Many of these recommendations have been incorporated in the government response and changes that are to be enacted.
Loan Charge 2020 – What has changed?
The key changes the government has stated it is bringing to the loan charge are:
- That it will only apply to outstanding loans made on, or after, 9 December 2010 (rather than the current 1999 cut-off date).
- It will not apply to outstanding loans made in any tax years before 6 April 2016 if the avoidance scheme use was fully disclosed to HMRC and HMRC did not take any action (such as opening an enquiry).
- Individuals can now elect to pay 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 – 2019, 2019 – 2020 and 2020 – 2021. This also gives additional flexibility on when the outstanding loan balance is subject to tax and could mean that the loan balance is not subject to higher rates of tax.
- Voluntary payments will be refunded by HMRC (also known as ‘voluntary restitution’) already made in order to prevent the loan charge arising and included in a settlement agreement reached since March 2016 (the date at which the loan charge was announced) for any tax years where:
- It no longer applies (the loan charge, for loans made before 9 December 2010)
- Loans were made before 6 April 2016; the avoidance scheme use was fully disclosed to HMRC and the department did not act (such as opening an enquiry)
The amendments to the loan charge will also give customers additional flexibility over payment terms. These include time to pay arrangements of five, or even seven years in certain circumstances and in other circumstances, there is no maximum time limit for a Time to Pay arrangement.
What will happen next?
New legislation will be introduced by the government to implement the changes above. More detailed guidance and draft legislation will be published in early 2020, together with a timetable for implementing the changes. The government has indicated that these changes are expected to become law by summer 2020. It will only be at this point that HMRC will be able to begin processing eligible refunds, where applicable.
For those who are yet to agree on a settlement for a loan charge with HMRC, this can be submitted by 31 January 2020, giving a best estimate of the tax due. Alternatively, this can be submitted by 30 September 2020. Penalties for late filing, late payment and inaccuracies in respect of the loan charge entries in these returns will be waived by HMRC. For the period 1 February 2020 to 30 September 2020, Late payment interest will not be payable, subject to a return being filed, and tax paid or an arrangement made with HMRC to do so, by 30 September 2020.
What should people affected by the loan charge do now?
If you have a loan charge liability, you will need to calculate whether you are affected by these changes. Working out settlement amounts can be complex and we recommend that anyone affected by this takes professional advice. If you would like to discuss your 2018-19 position and are unsure what to do with regards your tax return or the loan charge, then please do not hesitate to contact our expert tax team at Alexander & Co.
If you have not yet submitted a 2018/19 Self Assessment, you will need to consider whether it would be appropriate to make use of the extension. If a 2018/19 Self Assessment has already been submitted, you will need to consider if an amended tax return should be submitted by 31 January 2019, in light of the loan charge changes.
Anyone with a loan charge liability will need to calculate how these changes will affect them and consider what action to take. We do not advise simply waiting for HMRC to contact you. Depending on your circumstances it may be prudent to defer your tax return, however, you will need to fully understand all the implications of this before doing so.
Why Alexander & Co
Here at Alexander & Co, our team has expert knowledge and experience in assisting many diverse businesses. We work tirelessly to understand how clients’ businesses work and how best to assist their specific needs.
We can review your personal circumstances and advise on whether any payments made to you are likely to be liable for Loan Charges and assist in dealing with HMRC on your behalf. We can also calculate any revised loan charge liability or estimate refunds due in light of the proposed changes to this legislation.