HMRC gives ground as loan charge review is complete
Following an independent review, the government has announced new measures designed to ease the impact of its controversial loan charge.
The charge will now only apply to disguised remuneration loans taken out on or after 9 December 2010. Other mitigating effects include the possibility of spreading the loan balance across three consecutive tax years, along with more flexible Time to Pay arrangements.
HMRC says that the measures will result in 30,000 people facing a reduced tax liability, which is more than 60% of the total number of payees. This includes 11,000 people who will be taken out of it altogether.
Critics maintain that the fundamental problem with the loan charge remains unchanged: i.e. through no real fault of their own, many contractors are still facing significant repayments on the back of what is effectively a retroactive tax grab. That said, among contractor accountants and small business accounting commentators, the general consensus is that the changes to the loan charge regime are “better than expected”.
Here’s a closer look at the changes, and at what they mean for anyone facing a loan charge liability.
The loan charge: a quick recap…
The loan charge came into effect in April 2019 as a means of recouping unpaid taxes from remuneration loan schemes. These schemes had started appearing from 1999 onwards and involved contractors agreeing to receive interest-free loans in lieu of all or part of their wages.
HMRC’s stated view was that these de facto non-repayable “loans” were nothing more than a means of avoiding tax and NI. As such, the argument was that they ought to be treated in the same way as any other form of disguised remuneration. Under the original loan charge provisions, the total amount of disguised remuneration loans received by a worker were added up and treated as if they were profits received in the tax year 2018/2019. You can read more about the background to this in our Loan Charge Explainer.
Why the review?
Following the introduction of the loan charge, large numbers of contractors suddenly found themselves facing life-changing tax liabilities. As an illustration, if a worker had spent ten years in a scheme on a salary of £30,000, they could be facing a repayment sum in excess of £80,000. It quickly became clear that charge was going to have a potentially devastating impact on the finances of thousands of ordinary workers.
Contractor accountants along with many politicians also called into question the retrospective nature of the charge. As the Loan Charge Action Group (LCAG) points out, year after year, tax returns had been completed by workers and their accountants, including full disclosure of the loan arrangements. HMRC had ample opportunity to challenge the returns but failed to do so. After years of effectively allowing people to run up huge tax debts, HMRC suddenly implemented a charge which sought to tax all loan amounts received as far back as 1999.
Amid claims that the charge was both unfair and draconian, the government tasked the former head of the National Audit Office, Sir Amyas Morse to lead an independent review. The findings were published just before Christmas, along with the government’s own response, including a package of changes.
At a glance: what has changed?
The government’s response includes the following key changes:
- The loan charge will now only apply to outstanding loans entered into on or after 9 December 2010.
- The loan charge will not apply to any outstanding loans made in any tax years before 6 April 2016 where use of the scheme was fully disclosed to HMRC and where HMRC did not take action.
- It is now possible to spread the amount of the outstanding loan balance evenly across 3 tax years: 2018/19, 2019/20 and 2020/21.
- Where taxpayers have already made payments under the voluntary restitution scheme since March 2016, these payments will be refunded where:
- the loan charge no longer applies (i.e. relating to loan arrangements from before 9 December 2010)
- Loans were made before 6 April 2016, the avoidance scheme was fully disclosed to HMRC and HMRC did not take any action.
- For taxpayers with no disposable assets who earn less than £50,000, HMRC will agree Time to Pay arrangements for a minimum of 5 years. This is extended to 7 years for individuals earning less than £30,000. if you need longer than this, it is possible to negotiate individual Time to Pay arrangements, although HMRC will require detailed financial information to agree it.
- Unless you have a very high level of disposable income, annual payment requirements under Time to Pay arrangements will be no more than 50% of your disposable income (in line with existing Time to Pay practice).
If you need longer than this, it is possible to negotiate individual Time to Pay arrangements, although HMRC will require detailed financial information to agree it.
Unless you have a very high level of disposable income, annual payment requirements under Time to Pay arrangements will be no more than 50% of your disposable income (in line with existing Time to Pay practice).
How significant are the changes?
To the government’s credit, most of Morse’s recommendations have been taken on board. There are some exceptions, however. Notably, the review recommended what was essentially a 10-year amnesty for anyone earning less than £30,000. In other words, once they had agreed payment terms with HMRC, any amounts still outstanding after the arrangement has been in place for a decade would have been written off. This proposal has not been adopted, presumably because it would provide a pretty obvious incentive for people to attempt to string out their payment arrangements for as long as possible.
HMRC says that its stance on remuneration loans has always been unambiguous; namely that such schemes have “never worked”. Certainly, when these loan schemes were prevalent, many contractor accountants London and elsewhere (ourselves included), advised their clients to treat them with extreme caution for fear that HMRC would get around to reining them in sooner or later.
However, that’s not to say that HMRC were shouting from the rooftops about these loans from the moment they came onto the scene. Morse’s report suggests that HMRC only really made its view clear by way of an amendment to the income tax legislation introduced on 9 December 2010; hence the core recommendation that the charge should only apply to arrangements made on or after that date.
If my loans pre-dated 9 December 2010, is that the end of the matter?
The government’s proposed change means that this particular tax recovery provision, i.e. the loan charge, will no longer apply to loans from before that date. However, that’s not quite the same as HMRC giving a free pass to everyone who took out disguised remuneration loans in the first decade of the century. Remember; HMRC continues to take the stance that these loans were fundamentally illegitimate. It is still theoretically possible for HMRC to attempt to issue discovery assessments in respect of these.
However, to do this in individual cases, it would need to prove deliberate attempts to conceal information: a tall evidential order.
We can expect further litigation on this as 2020 progresses – so watch this space for updates.
What this means for your 2018/19 tax return
HMRC states that individuals affected by the loan charge who have not yet filed their Self Assessment tax return or agreed a settlement with HMRC now have a choice regarding submission. You can either submit by 31 January 2020, giving your best estimate of the tax due or else file by 30 September 2020 (by which time you should have an exact figure for your actual liability). No late payment interest will be levied so long as the 30 September 2020 deadline is met.
Are you facing a loan charge repayment demand? Wondering how best to structure Time to Pay arrangements? For all aspects of contractor accounting, speak to MJH Accountancy today.