Loan Charge remains an issue for an estimated 50,000 people in the UK, with an important deadline approaching on 30 September 2020. Those dealing with a Loan Charge will have to act now to meet this deadline as assessments and calculations will need to be carried out and agreement reached with HMRC ahead of this date.
Here we recap on what the Loan Charge is, what changes were brought in following the conclusion of a review earlier this year and most importantly, explain the notices to file and what action needs to be taken now, to meet the 30 September 2020 deadline.
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 offshore trust. The loans 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 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, but not all the recommendations have been incorporated in the government response and the changes that have now been enacted in the Finance Bill 2020.
Loan Charge 2020 – What has changed?
The key changes the Government made to the loan charge are:
- It only applies to outstanding loans made on, or after, 9 December 2010 (rather than the previous 1999 cut-off date)
- It does 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 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: 2018/19, 2019/20 and 2020/21. 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, there is no maximum time limit on a time to pay arrangement.
What is the 30 September Loan Charge deadline?
30 September 2020 is an important deadline that people affected by Loan Charge should be aware of. There is much that needs to be calculated and agreed with HMRC before this date, so it is important to act now and seek professional advice, where required.
Alexander & Co’s experience is that it can take considerable time to gather the necessary information which HMRC will require. This is because many scheme providers are no longer trading and offshore trusts can be reticent to provide the quality of information required.
‘November 2017 Terms’ must be settled by this date. This is a more favourable settlement term for those who provided HMRC with all the information they required by 5 April 2019, have continued to engage with HMRC and have replied by all dates provided to them. These terms are no longer open to those that did not enter disclosure with HMRC by 5 April 2019.
HMRC should have already contacted anyone who falls into this category. If they have not, you should get in touch with them as soon as possible.
Do bear in mind that if you do not reply to HMRC by the dates they stipulate, they are unlikely to settle with you under the November 2017 Terms and full payment will be required. Furthermore, if you have an open enquiry or assessment, these will still need to be dealt with – outside of these terms.
For those outside of the ‘November 2017 Terms’ 30 September 2020 is the date in which they are required to:
- Report the loan amounts if this has not already been done
- Decide whether to choose to spread the loan amounts over three years
- If you have not already done so (the deadline was 31 January 2020) file your 2018/19 tax return, reporting loan income in the relevant sections.
- Pay the Loan Charge, together with any other tax due unless you can agree a payment plan with HMRC
What do you need to do before the 30 September Loan Charge deadline?
Before this deadline, you are required to complete a Loan Charge reporting form. You may have also received a notice to file from HMRC, requiring you to complete self-assessment tax returns for the year(s) applicable, if you have not already submitted returns for these years.
The loan charge reporting form is required if you want to spread your outstanding loan balance evenly over three tax years. You must still complete the form if you have not already reported your loan amounts. If you have previously completed this form, you do not need to amend (if your loan charge liability has changed) unless you want to make the spreading election.
Notices to file 2018/19 tax returns have recently been issued by HMRC to all individuals they believe may need to report and pay the loan charge by 30 September 2020, who have not already filed or notified HMRC of their need to file one. As the end of the 2019/20 tax year has now passed, 2019/20 notices to file may also have been issued.
Whilst individuals should have notified HMRC by 5 October 2019, HMRC has advised that no failure to notify penalties will be issued for 2018/19 if they were only required to notify due to the loan charge.
If you expect to settle with HMRC before the 30 September 2020 deadline and have no other reason to complete a tax return for 2018/19 or 2019/20 and have received these notices, you can ask HMRC to withdraw the notices to file, which they may do once you have settled.
If a 2019/20 notice to file has been received from HMRC, and you do not plan to make the irrevocable spreading election and there is no other reason to complete a tax return for this year, you can also request that HMRC withdraws the notice to file. In this situation, you should also ensure that you claim to reduce any payments on account generated from the inclusion of the loan income in your tax return for 2018/19.
If you have not received a notice to file, but believe you were in a loan scheme, you should contact HMRC, however, it would be wise to take professional advice beforehand as our experience has been that in some cases a quick settlement is requested, which may not actually be required.
Will the 30 September Loan Charge deadline be extended because of Coronavirus?
We do not believe there will be any extensions to the 30 September 2020 deadline. Whilst HMRC recognise this is currently a difficult time, most people have the time they need to meet the deadline.
The Government has already introduced a rule allowing HMRC flexibility with the 30 September 2020 deadline, to make an election to spread the loan charge, and not to apply interest for certain groups only. We envisage that this flexibility will be used by HMRC in very limited circumstances, if at all.
It has, however, previously been stated by HMRC that they will consider waiving late filing and payment penalties on an individual, case-by-case basis for 2018/19 tax returns filed after 30 September 2020, where these are connected to a Loan Charge.
Coronavirus has affected my income – will this affect my Loan Charge liability?
If your income has been reduced in the 2020/21 tax year, you could pay less if you agree with HMRC to spread the loan income over the three years allowed. This was already permitted, regardless of the impact of Coronavirus.
This can save you money if, by proportioning the loan income over a longer period, it avoids you from falling into a higher income tax band. This may also avoid triggering the High-Income Child Benefit Charge, or from losing your personal allowance.
Arrangements to pay
Arrangements to pay are based on individual circumstances, at the time that you apply. If your income has been significantly reduced in 2020/21 this could be relevant to any payment arrangements with HMRC.
For those who earned less than £50,000 in the 2017/18 tax year and have no other source of wealth, HMRC will agree a payment plan spread over a minimum of five years. For those who earned less than £30,000 (with no other source of wealth), HMRC will agree a payment plan of at least seven years.
Payment plans for longer than 5 to 7 years may be agreed by HMRC if this is required, but only based on individual circumstances. There is no maximum time limit for such arrangements to pay and HMRC will not ask anyone to pay more than 50% of their disposable income.
Do bear in mind that if your financial position significantly improves, HMRC may seek to renegotiate a payment arrangement with you, to collect what is owed more quickly. Interest is payable on any arrangements that are agreed. The current rates can be found here.
What to do if you are confused with your Loan Charge liability
If you remain confused with how to approach paying your loan charge (it is a complicated area of personal tax) it is always recommended you take professional advice, before speaking to HMRC, to understand your own liability. You should do this leaving as much time as possible before the 30 September 2020 deadline.
How Alexander & Co can help
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 have wide experience in assisting clients who previously secured loans from many of the largest providers.
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 considering the changes to this legislation.