The loan charge is an anti-avoidance measure to counter ‘disguised remuneration’ schemes where individuals were 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 an independent review into the policy and implementation of the loan charge, the Government has issued draft legislation and guidance detailing a package of changes to the loan charge.
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
- certain 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 have been unsure of their position and, if aware of it, may have taken advantage of the extended deadline of 30 September 2020 offered by HMRC for these cases. 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 is made with HMRC to pay, by 30 September 2020.
Employers who have paid the loan charge will be able to recover any sums owed to them as a result of the changes. Where a settlement had not yet been agreed, HMRC will write to the employer or employee, depending on who is settling the charge, by 31 July 2020 to confirm what action is needed in these cases.
What should people caught by the loan charge do now?
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.
HMRC’s issued guidance should be followed and professional advice sought where necessary. It would be unwise to simply wait for the arrival of the letter from HMRC.
For more information please get in touch with Andrew Robins.