The UK tax authority has published final guidance on the Loan Charge regime, following the enactment of amendments in the UK Finance Bill 2019-21.
The Loan Charge applies to individuals who have directly entered into disguised remuneration (DR) schemes. Specifically, it is intended to bring within the charge to tax tax-avoidance arrangements that enabled users to avoid income tax and national insurance contributions by taking salaries in the form of a loan. In reality, this loan would never be paid back.
The Loan Charge came into effect on April 5, 2019, and was to apply to all loans made since April 6, 1999, if they were still outstanding on April 5, 2019, and the recipient had not settled the tax due.
Amid concerns from lobby groups and lawmakers as to whether the charge was lawful, the Government commissioned an independent review of the loan charge in September 2019. The Government responded to the findings of the review with the announcement of a package of changes on December 20, 2019.
It decided that the Loan Charge will apply only to outstanding loans made on, or after, December 9, 2010. In addition, the Government said the Loan Charge will not apply to outstanding loans made in any tax years before April 6, 2016, where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, by opening an enquiry).
New Loan Charge Guidance
On August 13, 2020, HMRC released an update to its policy paper "HMRC issue briefing: settling disguised remuneration scheme use and/or paying the loan charge". It also released guidance for tax agents in "Disguised remuneration settlement terms 2020", discussed in detail below.
According to the policy paper, depending on a taxpayer's circumstances, some taxpayers may be required to act before September 30, 2020.
HMRC noted most people who have used DR schemes will fall into one of five main groups, depending on their circumstances:
- Customers who have settled with HMRC and are not due a refund (for whom no further action is needed in relation to the loan charge);
- Customers still settling with HMRC (action required by September 30, 2020, to avoid the Loan Charge);
- Customers who have not settled and will pay the loan charge (these persons must file a 2018-19 tax return by September 30 and pay their 2018-19 liability in full or agree a time to pay arrangement);
- Customers who have settled and are due a refund or waiver following the independent review (HMRC will contact these persons);
- Customers who no longer have to pay some, or all, of the loan charge but have not settled all of their use of DR schemes (these persons should refer to the August 2020 guidance for tax agents, discussed below).
The policy paper sets out how HMRC will engage with taxpayers to secure a settlement. It says taxpayers who provided the necessary information about their scheme use by April 5, 2019, and who work with HMRC to conclude a settlement by September 30, 2020, will be able to settle under terms published in 2017 and keep clear of the Loan Charge. These terms will be withdrawn after September 30, 2020, the guidance says.
Those unable to pay the Loan Charge, even after spreading it out over three years, may contact HMRC to negotiate an affordable payment plan. Those with an income of less than GBP50,000 that have no disposable assets may access a five- or seven-year payment plan without having to provide detailed financial information.
HMRC concluded: "Customers who do not wish to settle the tax due in respect of their DR schemes under our published terms have the option of taking their case before the tribunals and courts. HMRC's view is that DR schemes are a clear example of tax avoidance that do not achieve the intended tax advantage, which we are duty-bound to pursue."
"As the litigation process could take between one and 10 years, customers who adopt this course of action risk paying additional legal costs and interest."
"We will continue to progress and settle open enquiries into DR under our existing powers, including schemes that are now out of scope of the loan charge. This approach was endorsed by the independent review."
Disguised Remuneration Settlement Terms 2020
According to HMRC, the newly released 2020 settlement terms include the main features:
- customers agree to pay Income Tax, National Insurance contributions, late payment interest, and, where relevant, Inheritance Tax charges; and
- penalties for making an inaccurate Self Assessment return will only be charged on an exceptional basis for years up to 2018 to 2019.
According to HMRC, the main differences with the 2017 terms are:
- Under these terms all statutory late payment interest must be paid;
- Tax will be charged where a director's settlement liability is paid voluntarily by the employer company, and the director does not 'make good' the tax charge. This is to cover the benefit of having their tax bill paid by their employer;
- For corporate employers, Corporation Tax relief on Income Tax and National Insurance contributions included within settlements will be allowed at a later date than under the 2017 terms. Corporation Tax relief for any contributions into arrangements such as an employee benefit trust made on or after April 1, 2017, may also be restricted to a later date or denied, because the law was amended from this date, HMRC said.