The loan charge is an anti-avoidance measure to counter ‘disguised remuneration’ schemes where individuals are paid in the form of loans, replacing all or part of their salary. Under the loan charge legislation any loans taken out under such schemes since 1999 and still outstanding on 5 April 2019 became taxable as income, in a lump sum, on that date. Prior to 5 April 2019, affected individuals could have entered into an agreement to settle past liabilities on the basis that the loans were taxable income in the year(s) they were taken out.
So what’s new?
Following the conclusion of an independent review into the policy and implementation of the loan charge, the Government has issued guidance confirming that it will make a package of changes to the loan charge. Draft legislation and detailed guidance will be published in early 2020.
The key changes are that:
- the loan charge will apply only to outstanding loans made on or after 9 December 2010;
- the loan charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme used was fully disclosed to HMRC and HMRC did not take action (for example, by opening an enquiry);
- taxpayers can elect to spread the loan charge by recognising the amount of the outstanding loan balance across three tax years (2018/19, 2019/20 and 2020/21);
- HMRC will refund voluntary payments already made in respect of settlement agreements reached since March 2016 (when the loan charge was announced) for any tax years where the loan charge no longer applies; and
- taxpayers will have additional flexibility over the way and period over which they pay the loan charge.
What happens next?
HMRC will write to affected taxpayers it is aware of in early 2020 to explain how the changes apply to them. In the meantime, affected taxpayers required to submit a self-assessment return for 2018/19 may be unsure of their position. HMRC has confirmed that such returns can either be filed by 31 January 2020, giving a best estimate of the tax due, or filed by 30 September 2020. HMRC will waive penalties for late filing, late payment and inaccuracies in respect of loan charge entries in these returns. Late payment interest will not be payable for the period from 1 February 2020 to 30 September 2020, provided that a return is filed and tax paid, or an arrangement made with HMRC to pay, by 30 September 2020.
What should people caught by the loan charge do now?
People who have a loan charge liability must work out whether, and how, they are affected by these specific changes. Professional advice should be sought where necessary.
If a person has not yet filed a 2018/19 self-assessment return, they should consider whether it may be appropriate to make use of the extension to the filing deadline. In other cases, HMRC’s issued guidance should be followed. However, where a 2018/19 self-assessment return has already been filed, consideration should be given as to whether an amended tax return should be filed before the 31 January 2020 tax payment date.
The changes announced by HMRC will affect different people in different ways. Everybody with a loan charge liability needs to work out how they will be affected and what they should do now. It would be unwise to simply wait for the arrival of the letter from HMRC, particularly if a self-assessment return for 2018/19 is required. Some people may be able to, and may wish to, defer submission of their 2018/19 tax returns. However, the implications must be considered carefully and understood, so that an informed decision can be made on the approach to be adopted.