As the loans, in reality, were never repayable, the loan charge legislation was introduced in order to tax individuals who benefited from these forms of disguised remuneration. The loan charge impacts on both employees and employers.
The loan charge has been extremely controversial and resulted in an independent review being completed late last year. In HMRC’s latest guidance they have indicated that there will be no further changes to the loan charge legislation. HMRC have also made it clear that settlement will only be made in accordance with the legislation to ensure that all taxpayers are treated equally. Therefore, there will be no “exceptional circumstances” or “special terms” applied to settlements.
As a result of the independent review, the loan charge only applies to loans which were made on or after 9 December 2010 that were still outstanding at the 5 April 2019. The loan charge does not apply to outstanding loans in the period from 9 December 2010 to 5 April 2016, if the avoidance scheme was reasonably disclosed to HMRC and no further action was taken by HMRC.
Individuals who have already settled with HMRC, do not need to take any further action. Similarly, any individual who has already settled with HMRC and are now due a refund from HMRC as a result of the independent review, do not need to take any further action, HMRC will contact you directly.
Individuals who are in the process of agreeing a settlement with HMRC should engage with HMRC to conclude the settlement prior to 30 September 2020.
Any individual who is subject to the loan charge and hasn’t already reported this to HMRC, will need to take immediate action as the 30 September 2020 deadline approaches. Any outstanding loans must be reported on the 2018/19 Self-Assessment income tax return and also reported to HMRC online via the loan charge reporting form by this date. The information to be returned to HMRC will include, the scheme details (name of the scheme, start and end dates, DOTAS number), HMRC case reference number, details of the loan outstanding (total loan, amounts repaid and written off) for each respective tax year and details of any national insurance contributions already settled.
Individuals can allocate the loan balance over 3 tax years, i.e. 2019, 2020 and 2021 in order to spread the associated tax cost. In order to avail of this an election must be made to HMRC by 30 September 2020. HMRC are also willing to agree payment terms with individuals who may require them.
Some individuals may have already paid tax to HMRC if they were issued with an accelerated payment notice (“APN”). In this instance any APN tax paid could be offset against the loan charge providing it relates to the same anti-avoidance scheme and tax year.
The loan charge also impacts on employers who used a disguised remuneration scheme to remunerate employees through the provision of loans. However, if the employer-provided the relevant information on the avoidance scheme to HMRC by 5 April 2019 and the enquiry settled by 30 September 2020, the employer could still avail of the November 2017 disguised remuneration settlement terms. These are due to be withdrawn with effect from the 1 October 2020.
Under these settlement terms, if settlement is reached on the outstanding PAYE and NIC on the disguised remuneration, there would be no double tax charge and the employee’s loan charge subsequently reduced to nil. From 1 October 2020, a double tax charge could arise making settlement more costly.
It is extremely important to note that settling the loan charge by 30 September 2020, does not automatically settle any ongoing tax enquiry with HMRC into the avoidance scheme. Where there is an open enquiry, settlement will still need to be reached with HMRC and now is the time to act.
As the 30 September 2020 loan charge deadline looms, it is important that anyone who may be impacted by the loan charge legislation considers the next steps and seeks independent advice.
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.