The New Year brings new changes to loan charges from HMRC

Many of you will be aware that the government introduced legislation, commonly referred to as “the loan charge”, in the Finance Act 2016 to address the tax loss to the Exchequer from disguised remuneration schemes.

In accordance with the legislation, any loans taken since 1999 which remain outstanding on 5 April 2019 became taxable as income on that date. 

In the period up to 5 April 2019, H M Revenue and Customs (“HMRC”), who were tasked with administering the loan charge, encouraged taxpayers to enter into negotiations to reach a settlement in respect of these disguised remuneration schemes in order to avoid the loan charge.

As a result of an overwhelming public outcry in respect of the retrospective nature of the legislation, an independent review was initiated at the end of 2019 by Sir Amyas Morse. Following the outcome of the review, the government has announced a number of changes to the loan charge which are summarised as follows:

  • The loan charge will only apply to outstanding loans made on, or after, 9 December 2010.
  • The charge will not apply to outstanding loans made in tax years prior to 6 April 2016, provided the avoidance scheme used was fully disclosed to HMRC and HMRC did not take action.
  • The amount of any outstanding loan balance as at 5 April 2019 (recalculated in line with the above) may be spread evenly across three years from 2018/2019 to 2020/2021 inclusive. This concession provides flexibility on the tax point date, and may avoid the higher rates of tax in full or in part.
  • HMRC will refund payments made which constituted voluntary restitution in order to prevent the loan charge arising and were included in a settlement agreement reached since March 2016 for any tax years where:
    • The loan charge no longer applies on the basis the loan was made before 9 December 2010.
    • The loan was made prior to 6 April 2016 and although the scheme was fully disclosed to HMRC the department did not take action.

There are also changes which have been designed to give individuals assurance with regard to settlement terms. In summary, these surround Time to Pay arrangements with HMRC, provide a minimum repayment period depending on taxpayers earnings levels. Where earnings:

  • Are less than £50,000, HMRC will agree a minimum of 5 years
  • Are less than £30,000, the timescale extends to 7 years.

It must be borne in mind that at present these are proposed changes and draft legislation, and detailed guidance is expected early this year. HMRC have committed to writing to those taxpayers it knows used a disguised remuneration scheme and either settled the tax due or has not and could be liable to the loan charge to explain the impact of the changes.

No refunds will be made by HMRC until the legislation has received Royal Assent, which is expected to be summer 2020.

Finally, it is important to note that the loan charge legislation does not impact or resolve the underlying tax dispute with HMRC in respect of any open enquiries or assessments in place. As such, it would still be necessary to resolve these matters either by way of settlement negotiations with HMRC or through litigation.

Where taxpayers have been involved in disguised remuneration planning, it is recommended that they take specialist advice, given the complex nature of the legislation. If you would like to discuss any of the above points in further detail, please speak with your usual Wilkins Kennedy contact or with a member of our tax team.

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