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  • Eoin Holohan

Loan Charge Explainer: What Will Happen in 2020?

Updated: Dec 17, 2019


When is a loan not a loan? So far as the UK taxman is concerned, it’s where there was no real intention for it to be repaid – and where the whole point of the arrangement was to avoid tax and NI.


HMRC classifies such arrangements as disguised remuneration: a form of tax avoidance that it has long maintained simply “doesn’t work”. The practice of reimbursing workers via loan remuneration schemes became popular two decades ago. But despite HMRC apparently always claiming that these schemes were illegitimate, it took until the 2017 Budget before concrete plans finally emerged for the systematic recovery of back taxes.

Hence we now have the loan charge: a rather blunt measure that seeks to get back from employers and workers the previously unpaid taxes linked to loan-based schemes that were in place in the 20-year period up to 5 April 2019.


The current upshot is this: if they have not already reached a settlement with HMRC, remuneration loan scheme participants have until 31 January 2020 to pay what they owe, or else agree a repayment plan.


Here’s a closer look at disguised remuneration loans, at how the loan charge works – and at what the future might hold for this controversial measure.


Remuneration loans: how did they come about?


In the late 1990s, HM Treasury started looking closely at the increasing number of contractor/client arrangements that seemed to be supplanting the traditional employment relationship. In the Government’s view, the intention behind them was clear: this was a ruse for employers to avoid NICs and for workers to reduce their personal tax burden.


So in 1999, the Government brought in IR35: a measure that sought to reclassify many of these contractors and freelancers as employees, and to tax them accordingly. But the original version of IR35 was both complicated and vague, something that’s almost always a recipe for contractor accountants and small business accounting advisors to find loopholes.


Sure enough, to exploit IR35’s grey areas, {accountants] began marketing remuneration loan schemes. Key features of these included the following:

Contractors (along with some employees and company directors) would agree to receive an interest-free loan in lieu of all or part of their wages.


Payment of the loan was generally made through an Employee Benefit Trust (EBT) funded by the employer. For maximum tax and cost advantage, these trusts tended to be based offshore.


There was a clear understanding that these loans were non-repayable. This included provisions them being written off on death, in addition to mechanisms for the loan to be ‘disappeared’ in the event of the employee/contractor moving abroad.


Early attempts to tackle disguised remuneration

The Finance Act 2011 successfully halted the mass marketing of most disguised remuneration loan schemes. However, a couple of arrangements lingered on in general usage:


EFRB Schemes: Post-2011, HMRC noted an increase in the number of loan arrangements using an Employer Financed Retirement Scheme in place of an EBT.

Umbrella Companies: Frequently used by agency workers as a means of streamlining their tax admin, umbrella companies assume the role of an “employer”. Even after 2011, some umbrella companies have continued to give their users the option of payment through non-repayable loan arrangements.


HMRC’s view on EFRB Schemes and arrangements offered through umbrella services is the same as for all other forms of disguised remuneration: that these schemes have “never worked”.


What is the loan charge?

The loan charge was formally announced by the Treasury in 2017 and came into effect on 5 April 2019. The charge applies to all loans made since 6 April 1999 if they are still outstanding and the recipient has not settled the tax due on them.


For contractors affected, how is the loan charge calculated?


The total amount of disguised remuneration loans the worker received is added up. The loans outstanding incur an Income Tax and National Insurance contributions charge as if they were profits received in the tax year 2018 to 2019.


For instance, let’s say you took out a total of £100,000 in remuneration loans in various years between 1999 and 2019. Alongside this, your net profits as a self-employed contractor for the 2018/19 tax year is £40,000. For this tax year, you will be taxed on the total amount of £140,000.


What is the settlement scheme?


Back in November 2017, HMRC published settlement terms designed to encourage loan users to settle their cases. Crucially, under these settlement provisions, tax was calculated using the bands and rates in the years payments were made rather than applying the 2018/19 rates to the whole amount (potentially a significant saving). Under the settlement terms, signatories could also arrange a payment plan of 5 to 7 years, or longer if necessary.


To make use of the November 2017 terms, loan recipients were required to contact HMRC and provide all required information by 5 April 2019.


What if I was a loan recipient and did not make use of the November 2017 settlement terms?


You were required to report any outstanding disguised remuneration loans to HMRC before 1 October 2019. If you have not already done so, you should report your loan immediately to minimise daily penalty charges.


Who has been affected by the loan charge?


HMRC estimates that its loan charge policy package will boost Treasury coffers by £3.2 billion. It states that the bulk of this will come from employers, representing amounts that ought to have been received by HM Treasury via PAYE, with 25% coming from individuals. The official estimate of the number of individuals affected is around 50,000. Most (65%) are in the business services sector. 10% are in construction, and “fewer than 3%” work in medical services and teaching. The tone HMRC’s of commentary seems to imply that these were mostly wealthy professionals who knew exactly what they were doing when entering into these schemes.


However, to opponents of the charge, this is a retrospective and immoral tax grab masked as an anti-avoidance measure. The Loan Charge Action Group (LCAG) estimates the number of people affected at 100,000. Far from being sophisticated tax avoiders, most were merely following what seemed to be legitimate advice from professional bookkeeping services and payroll services. Others were acting on the suggestion of their employers - and these included the likes of local councils, the BBC and NHS trusts.

Also, the amounts to be paid back are far from modest. For instance, LCAG figures suggest that if you were in the scheme for 5 years on a salary of just £30,000, the loan charge sum could be in excess of £40,000. The impact of such amounts on ordinary people could be devastating - bringing with it the possibility of people losing their homes.


December 2019 latest: What’s happening with the loan charge review?


In response to concerns over the impact of the charge, the Chancellor commissioned an independent review. This was supposed to report back in mid-November but because of the general election it will now be delayed until there is a new Government in place.

We are therefore currently in limbo: we do not know what the review will recommend, or whether whichever Government is in power will accept its recommendations. Most political parties have been silent on the topic in the campaign, the exception being the Liberal Democrats, whose leader, Jo Swinson has pledged to abolish it outright.


Where does all this leave loan participants?


If you opted to settle your case under HMRC’s November settlement terms but you are yet to reach settlement, you should still report the loan on a Self Assessment tax return. Once the settlement is concluded, you can then amend your tax return to remove the loan charge.


If you are not in the settlement process, you should have already notified HMRC of your loan(s). If you have not done so, you should still do it immediately. The loan charge will also need to be reported on your tax return. If you are not currently in Self Assessment, the deadline for registering for a 2018/19 tax return was 5 October 2019. If you have not met this deadline, you should register straight away using form SA1.


For people not in the settlement process, the amount payable under the loan charge is due by 31 January 2020.


As for the review, it’s a matter of keeping a lookout for further HMRC announcements to see whether they have an impact on the amounts payable and process for repayment.

What next?

It’s important to remember that HMRC can offer to help those who may have difficulty repaying what they currently owe. To make use of this, full disclosure and early communication with HMRC is essential. If you are a contractor who is worried about the impact of the charge, MJH Accountancy can help. Through our contracting accounting services, we can help you work through your options, including help with personal tax returns and communicating with HMRC.


Also, for all the latest updates on the loan charge review - including how it might affect the amounts you owe - be sure to bookmark our blog page.