An election has allowed taxpayers to spread the payment of tax resulting from the loan charge over three consecutive tax years, 2018/19, 2019/20 and 2020/21 by requiring a suitable proportion of it to be reported in tax returns for each of those tax years.
Taxpayers initially had until 30 September 2020 to make the irrevocable election. However, on 19 November 2020 HMRC issued Statement of Practice 1 (2020) confirming that it would automatically accept late elections made by an individual, or an agent on their behalf, on or before 31 December 2020. Elections made after 31 December 2020 will be subject to review on a case-by-case basis and may be accepted if there is an exceptional reason for the delay; it may not, therefore, be too late to make an election now.
If taxpayers have made the election to spread the loan charge over three tax years, the second instalment of the loan charge must be reported in the 2019/20 self-assessment tax return, which has to be filed by 31 January 2021. The associated tax liability must also be paid by this date.
There may be instances where HMRC has sent automated letters to those affected by the loan charge, stating that they no longer need to complete a tax return if the only item reported on their 2018/19 return was the loan charge. Taxpayers who have subsequently made the election, however, will need to re-register for self-assessment for the 2019/20 tax year to be able to report and pay tax on the loan charge.
If taxpayers cannot pay their full 2019/20 tax liability by 31 January 2021 and require a payment plan, they, or their agent, should phone the HMRC loan charge helpline on 03000 599110.
Failing to report the second instalment on the 2019/20 tax return when an election has been made will likely result in HMRC opening an enquiry for the year, with potential penalties for submission of an incorrect tax return, and interest for late paid tax. Taxpayers should therefore make sure that the second instalment is reported by 31 January 2021 to avoid these adverse consequences.