Loan charge tax avoidance schemes do not work, warns HMRC

HMRC has issued another warning about schemes and arrangements designed to avoid the 2019 loan charge on disguised remuneration, saying that these schemes do not work

In the latest HMRC Spotlight 49, following on from spotlights 36 and 39, HMRC says that despite earlier warnings, promoters continue to market these types of schemes.

The latest spotlight cautions against arrangements or schemes which may involve one or more of the following features. These include being marketed from an offshore location such as Cyprus, Malta or Isle of Man, claiming to avoid the 5 April 2019 loan charge legislation.

The schemes may claim that by entering the scheme, disguised remuneration loans are paid off, and may also claim that the scheme is not disclosable under the disclosure of tax avoidance schemes regime (DOTAS), and may have benefited from a QC opinion.

They may have professional marketing material, including a website.

HMRC warns taxpayers to beware of any arrangement that suggests a disguised remuneration loan can be ‘paid off’ or ‘repaid’ without a real economic consequence to the transaction – suggesting that the scheme user will not suffer any material financial cost (apart from fees).

It is HMRC’s view that the disguised remuneration loan charge legislation addresses attempts such as these to avoid the rules, as it disregards any non-monetary repayments. This means the outstanding loan balance will be subject to the charge. The legislation also excludes any repayments connected to a tax avoidance arrangement.

The guidance warns that anyone who signs up to such schemes is likely to pay administration and promoters fees that cannot be recovered, and to remain liable for the loan charge.

Anyone using one of these schemes or arrangements is advised to withdraw from it and settle their tax affairs. HMRC has published detailed guidance on how to report details of a disguised remuneration loan scheme and account for the loan charge liability.

An HMRC spokesperson told Accountancy Daily: 'Although the loan settlement opportunity closed at the end of September it is still possible to contact HMRC to register a possible loan charge and then to discuss a settlement agreement. They need to do this before the new tax year on 5 April and as long as they have registered by that time it will be reviewed, even if it is not resolved with HMRC before the beginning of the tax year'. 

Controversy

The introduction of the loan charge on disguised renumeration schemes on 5 April has attracted considerable controversy. 

An all-party Parliamentary group, headed by MP Edward Davey, sought to have the terms of the charge reviewed before its launch, although this has now been reduced to a review focused on the effect of changes made to the time limits for recovery or assessment where tax loss arises in relation to offshore tax, and compare these with other legislation including the charge on disguised remuneration loans.

In a letter to Davey on the issue, Ruth Stanier, HMRC director general, customer strategy and tax design, said: ‘Individuals who currently have an income of less than £50,000 and are no longer engaging in tax avoidance can agree a payment plan of up to five years without the need to give HMRC any information about their income and assets.

‘We have recently extended this to seven years for individuals who earn less than £30,000. People who consider they need more than five or seven years to pay what they owe, or who earn more than £30,000 or £50,000, should still come forward and talk to us about payment terms.

‘There are no defined minimum or maximum time periods for payment arrangements. We are committed to engaging with individual cases appropriately and sympathetically.’

Retrospective

Retrospective action has been heavily criticised across the board, particularly HMRC’s failure to offer any repayment arrangements for anyone who missed the loan settlement opportunity deadline last September and the retrospective nature of the charge.

HMRC is keen to stress that the measure is not retrospective and is merely dealing with unpaid tax.

An HMRC spokesperson said: 'The charge on DR [disguised remuneration] loans is not retrospective. It is a new charge, arising at a future date, on DR loan balances outstanding at that date. It does not change the tax position of any previous year, the tax treatment of any historic transaction, or the outcome of any open compliance checks.'

However, this is disputed by many who see the measure as highly retrospective.

ACCA head of taxation Chas Roy-Chowdhury said: ‘This is the only instance where HMRC can go back more than seven years, effectively moving the statutory deadline, which only happens when it is a case of tax evasion.

‘The loan charge has been badly handled by HMRC. Of course, some people took out these loans up to 20 years ago and did not pay income tax or national insurance, and some may have had no intention of paying  back the loans, but there are still people who are going to go bankrupt. There could be up to 50,000 people affected.

‘People had the opportunity to settle by the end of September [2018] but many did not because they thought it might be better to wait.

‘HMRC has made no effort to look at possible repayment terms. Some of these outstanding loans are for hundreds of thousands of pounds and HMRC needs to give these people the opportunity to speak to them, arrange repayment scheme, it could be structured in the same way as a mortgage payment over a long repayment period, maybe over years. HMRC simply cannot do nothing about this and just contact people on 1 April telling them they owe thousands.’

Breaking legal convention

A lobby group of contractors, the Loan Charge Action Group (LCAG) has backed calls for the prime minister to personally intervene and delay the loan charge and suspend all settlements, saying it knows of three suicides related to the charge whose terms it describes as ‘draconian’.

LCAG claims the loan charge breaks normal legal convention because it allows HMRC to impose  a retrospective 20-year assessment on arrangements that were legal and declared to them at the time.

It states: ‘The amounts involved are life-changing with most unable to pay, while also being deprived of their statutory rights to appeal, thousands are expected to go bankrupt with many expected to have to sell their homes.’

Addressing this point in her letter to Davey, Stanier said: ‘Fears that people will be made homeless because of HMRC debt enforcement activity in relation to the charge on disguised remuneration loans are unfounded. It is also the case that HMRC does not want to make anyone bankrupt. Bankruptcy is only ever reached as an absolute last resort, and very few cases ever reach that stage.’

Stanier said HMRC research indicted the majority (75%) of the yield from the loan charge measure is expected to come from employers rather than individuals. HMRC has agreed settlements on disguised remuneration schemes with employers and individuals worth over £1bn.

So far, around 85% of tax secured has come from employers, and less than 15% from individuals. There are an estimated 50,000 scheme users affected by the loan charge, representing about 0.1% of the UK taxpaying population.

Disguised remuneration: schemes claiming to avoid the loan charge (Spotlight 49)

Guidance Report and account for your disguised remuneration loan charge

Ruth Stanier letter on loan charge

By Pat Sweet, additional reporting Sara White

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