HMRC has recently released the draft legislation for the new changes to loan charges, in response to Sir Amyas Morse’s independent review, and the government’s own response to this. This legislation has been eagerly awaited in business circles, with Sir Morse suggesting a host of changes designed to revive the controversial charge
Whilst a number of options have been considered, the headline is that the loan charge remains in place, although considerable changes are to be introduced.
What Is The Loan Charge?
Introduced in the Finance Act 2016, the 2019 loan charge is an anti-tax avoidance measure, designed to address revenue lost through a number of ‘disguised remuneration’ schemes.
Under these schemes, individuals were able to take money in the form of loans from their employer, to replace all or part of their salary. These loans would usually come from an ‘employee benefit trust’, funded by the employer and with the ‘understanding’ that they would never need to be paid back.
Loans are not usually considered income for tax purposes, meaning that they are not subject to income tax or National Insurance Contributions for either employer or employee. This means that businesses and employees were able to avoid paying the tax that they should have been paying, if all the renumeration was declared as wages on their payroll.
The government accepted all but one of the recommendations set out in Amyas Morse’s report, meaning that a number of changes are to be applied to the charge.
Some of the key changes are:
- The loan charge is only to apply to any outstanding loans made on or after the 9th December 2010. Originally there was a 20-year ‘look back’ period meaning that thousands more businesses and individuals were to be targeted by the charge.
- The loan charge will not apply to outstanding loans made in any tax year before 6 April 2016, as long as the avoidance scheme was disclosed to HMRC at the time, and HMRC chose not to take any action.
- Individuals are now able to spread the amount of their outstanding loan balance across three tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021. This means that instead of having all loans treated as income in the 2018/2019 tax year, you are able to have ? treated as income for 2018/19, ? treated as income in 2019/20 and ? treated as income in 2020/21.
For people on a lower income, this means that it is more likely that their loan income will be taxed at 20% rather than at the higher rates and could be even less if an individual has some tax allowance spare for those tax years.
- HMRC will also refund any voluntary payments that have already been made in an effort to prevent triggering the loan charge, and included in a settlement agreement that was reached after March 2016 (the inception of the loan charge), for tax years where the loan charge no longer applies (before December 2010).
These recommendations and subsequent changes have been designed to help reduce what is considered the disproportionate nature of the loan charge, making it easier and more likely that those affected by it will be able to make restitution in full and avoid criminal penalties. For those on lower incomes, and without open enquiries or assessments, the changes should also help to save money.
A number of other recommendations were made towards changing the way that the tax system inherently works, making it more difficult for businesses and individuals to avoid tax through schemes such as these. It was pointed out that, even though the loan charge was a brutal and controversial move, the use of loan schemes has not ceased altogether.
The only recommendation that Sir Amyas Morse made that was not accepted by the government was that individuals on lower incomes (less than £30,000) in 2017/18, should have any remaining charge left wiped off the record after 10 years of paying.
Financial Secretary to the Treasury Jesse Norman said: “We welcome this careful and considered report, and I thank Sir Amyas and his team for their work.
“There have been important public concerns about this policy, and that is why we commissioned this report and have responded so quickly to it.
“The changes we are making go to the heart of Sir Amyas’s concerns about the fairness and application of the Loan Charge, which he accepts in principle.
“We also have plans under way to crack down further on the promoters of these avoidance schemes.”
A number of changes are to be put in place to deal with how payment of the loan charge is made, which is now based on the value of disposable income including assets. This will mean that:
- If you earn less than £50,000 and have no disposable assets, HMRC will allow payment arrangements to run across a minimum of 5 years
- If you earn less than £30,000, the minimum payment term will be 7 years
- If you earn more than £50,000 or have asked for more time to pay, HMRC will require detailed financial information in order to agree a payment arrangement. You will never be asked to pay more than 50% of your disposable income, unless your disposable income amount is very high
What Do The Changes Mean For Your 2018-19 Tax Return?
If you believe that you may be subject to the loan charge then, in light of the changes, you should be able to edit or refile your 2018/2019 tax return by 30 September 2020. This will allow you to make changes to your tax return and disclose your liability so that HMRC can investigate.
HMRC has confirmed that late filing, payment and inaccuracy penalties will be waived in this instance. Late payment interest will also be waived between 1 February 2020 and 30 September 2020, with the condition that the return be filed and tax paid, or an agreement entered into, before 30 September 2020.
This new approach has certainly blunted the impact of the loan charge legislation, but it undoubtedly will still have a huge impact on tens of thousands of taxpayers. Many people who utilised one of these schemes had no choice but to do so, and HMRC have consistently been vague in offering advice as to how they viewed them from a legal standpoint.
It is therefore no surprise that there remains a huge amount of bitterness and resentment aimed at those who have enacted this punitive and retrospective legislation. Our best advice is to talk to a financial advisor about your situation, as advice given by HMRC may not necessarily be in your best interest.
Why not give TFMC a ring to discuss the issues raised in this article, and how they impact you. You can reach us on 0800 470 4820 or by email at [email protected].