HMRC could delay its own tax receipts

03 April 2024

It is common for directors and shareholders to receive a loan from the company they work for or hold shares in. Indeed, over the last decade or so, many may have taken loans throughout a year with the view to then clearing the outstanding balance with a later dividend or bonus payment, if only because it might be considered administratively easier to do so.

Loans provided by employers to employees, directors or other office holders can represent a taxable benefit. This may be the case when a loan is considered ‘cheap’ for income tax purposes or perhaps even interest-free and is not otherwise exempt. In this context, ‘cheap’ means that the employer charges interest on the loan at a rate that is lower than the ‘official rate of interest’ (ORI), as determined by the government. 

Given the rises in the Bank of England’s (BoE) base rate since 2022, one might reasonably assume that the current official rate of interest applicable to ‘cheap loans’ would be something in the region of 5%.  

That is not actually the case. For the 2023/24 tax year, the ORI was set at what was perhaps a surprisingly low rate of 2.25%.  

That means that if a director were, for example, to receive a loan from their employer of £100,000 for the whole of the tax year to 5 April 2024, the annual taxable benefit would be calculated at 2.25%, so £2,250. Income tax would then be charged on that taxable benefit.

In recent years, we have come to expect the ORI to be announced before the new tax year starts. For example, the increased rate for the 2023/24 tax year was made public on 28 February 2023 with the publication of a statutory instrument. The year before that, the rate was announced in mid-March of 2022 in an update to tax advisers. This gave taxpayers plenty of time to decide on whether to leave loans in place for the forthcoming tax year or to repay them in advance of that.

This year, however, is a different story. Instead of taxpayers being forewarned of the rate, there has been an ominous silence from HMRC. With the new tax year almost upon us, RSM contacted HMRC’s press office which confirmed that it expects the ORI for the 2024/25 tax year to be published on 6 April 2024. This is of course, the first day of the new tax year. The keen eyed will also note this is a Saturday and it’s not often updates like this are made over a weekend.

Those benefitting from a loan from their employer might reasonably assume there will be a substantial increase in the ORI and in turn the effective cost to them. We might expect the interest rate to be broadly in line with the BOE base rate of 5.25%. 

Perhaps the delay in announcing the ORI applying for the 2024/25 tax year is just an administrative oversight, but it might inadvertently delay some tax receipts for HMRC. The publication of a much higher ORI could spur some taxpayers into repaying their loans, or at least a proportion of them. 

Going back to the example of a loan of £100,000 – had an increase in the ORI been announced earlier this year, more people may have chosen to declare a dividend before the tax year end to reduce their loan balances. In this example, an additional rate taxpayer choosing to reduce their loan to nil by receiving a dividend could trigger a tax liability of up to £39,350. This tax would have been payable by 31 January 2025 if the dividend was declared before 5 April 2024. Instead, if the same dividend is made this month but after 6 April, the tax would not be payable until 31 January 2026. 

HMRC’s last accounts showed that debts due to them from taxpayers had increased by £4.3bn to £45.9bn as at 31 March 2023. You might have thought HMRC would be keen to potentially accelerate potential bumper tax payments that might have come from loan repayments. 

Granted, taxpayers are likely to pay increased tax as a result of the increased interest rate. Perhaps HMRC is playing the long game and hoping that an ORI increase falls under the radar, leading to higher benefit-in-kind tax charges. Ultimately, this doesn’t feel like part of a cunning plan but if it is then it might be one Baldrick would be proud of.