Government waters down loan charge rules
21 Jan 2020
The government has backed down on original time frame for loan charge compliance giving taxpayers who signed up to schemes approved by HMRC before 2015 greater leniency and offering five-year time to pay arrangements
21 Jan 2020
Following the review of disguised remuneration avoidance schemes by Sir Amyas Morse, the loan charge will now only apply to outstanding balances of disguised remuneration loans made between 9 December 2010 and 5 April 2019 inclusive. Previously it was intended to apply to any loans made through disguised remuneration schemes after 6 April 1999, which had not been repaid by 5 April 2019.
The charge will not apply to loans made in tax years before 2016-17 where a reasonable disclosure of the use of a disguised remuneration tax avoidance scheme was made within the relevant tax return or, where appropriate, associated documents, and HMRC failed to take any action (for example by opening an enquiry).
The Morse review was published in December, when the government announced that it would accept all but one of the recommendations, and the required legislation has now been published.
The legislation provides a definition of ‘reasonable disclosure’, stating that ‘a person’s tax return or accompanying documents must have identified the loan and the person to whom it was made, the arrangements under which the loan was made, and such other information as necessary for it to be apparent that a reasonable case could have been made that the person was chargeable to income tax on the amount of the loan’.
Those affected by the loan charge will be able to elect to split their loan balance over three consecutive tax years, 2018-19, 2019-20 and 2020-21.
HMRC says this will give taxpayers greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of income tax.
Under the original rules, the loan charge provided that where an individual had an outstanding loan balance at 5 April 2019, a relevant step had been taken at that point. That brought all outstanding loans into tax charge in tax year 2018-19.
Taxpayers have now been given a six-month extension to their payment deadline.
The changes mean late payment interest will not be payable for the period 1 February 2020 to 30 September 2020 on any self assessment liability as long as a tax return is filed and the tax paid, or an arrangement is made with HMRC to do so, by 30 September 2020.
The legislation also provides that no late payment interest will be due on payments on account for 2019 to 2020 where the payments are made by 31 January 2021 or are included in a payment arrangement by that date.
If the payment deadline is not met or there is no payment arrangement in place by that date, these changes will not apply and interest will accrue from the statutory due date.
After criticism of the unrealistic payment deadline, the deadline for the additional information form has been extended to 1 October 2020 from the original 1 October 2019 date which has now passed.
This form requires taxpayers to provide full information to HMRC relating to any outstanding disguised remuneration loans with outstanding tax.
The revised legislation does not contain details of the government’s commitment that HMRC will repay voluntary restitution that has been paid by individuals and employers since the loan charge was announced in March 2016.
This refers to years that would no longer be subject to the charge because the loans were made before 9 December 2010, or in the case of loans made before 6 April 2016, the avoidance scheme use was disclosed to HMRC and the department did not take action (for example, opening an enquiry.)
Legislation giving effect to this, together with details of the repayment scheme, will be published separately before Finance Bill 2019-20.
When the loan charge was introduced in 2016, HMRC estimates suggested around 50,000 individuals were likely to be affected. HMRC’s initial analysis of the design changes suggests that more than 30,000 individuals will benefit from these measures.
An estimated 11,000 people will be removed from the loan charge due to the date the loan charge applies from being changed to 2010 and the provisions for those who have made reasonable disclosures. Around 21,000 individuals will see the amount of tax they owe under the loan charge reduce as a result of the proposals to allow customers to split their loan balance over three years.
HMRC has published guidance on the loan charge which states that taxpayers will be given additional flexibility over the way they pay any tax due. For those without disposable assets earning less than £50,000, HMRC will agree time to pay arrangements for a minimum of five years, or a minimum of seven years for anyone earning less than £30,000.
Individuals earning more than £50,000, or who need longer to pay, will need to provide HMRC with detailed financial information. There is no maximum time limit for a time to pay arrangement. In line with existing practice, anyone who requests time to pay, will pay no more than 50% of their disposable income, unless they have a very high level of disposable income.
Where HMRC knows a taxpayer has used a disguised remuneration avoidance scheme and either settled the tax due, or has not settled and could be liable to pay the loan charge, it will write to them in early 2020 to explain what these changes mean for them.
Taxpayers who have not filed their tax return, or agreed a settlement with HMRC, should submit a self assessment tax return for the tax year 2018-19.
They can either submit by 31 January 2020, giving their best estimate of the tax due, or file by 30 September 2020. HMRC will waive any penalties for late filing and late payment. Late payment interest will not be payable on any outstanding tax for the period 1 February 2020 to 30 September 2020, as long as a return is filed, and tax paid or an arrangement made with HMRC to do so, by 30 September 2020.
HMRC’s guidance contains detailed information about the necessary steps for different categories of taxpayers and employers, depending on whether or not a settlement has been agreed or is waiting to be finalised.
Speaking after the announcement of the Morse review recommendations, Steve Packham, spokesperson for the Loan Charge Action Group said: ‘We welcome that it has now been accepted that it is wholly unacceptable for this retrospective law to apply as far back as 1999, which was disgraceful, and that closed years prior to 2016 will no longer be subject to the loan charge.
‘These are things that clearly undermined the rule of law. However, we continue to believe that the loan charge should not apply retrospectively at all and are concerned that many people will still be seriously impacted.
‘This is a big step forward, with a clear commitment that this dreadful law will be changed, a law that has already tragically cost lives.’
Draft legislation, Loan charge Issued 20 Jan 2020