In December 2019, the UK government announced it would make a package of changes to the loan charge, a measure designed to tackle a form of tax avoidance known as disguised remuneration.
The government made these changes in response to Sir Amyas Morse’s independent review of the loan charge policy and its implementation.
This guidance sets out the key changes to the loan charge and what they mean for different customer groups. Legislation has been enacted to make these changes, and further guidance has been published, which we explain in this article.
What is the loan charge?
The loan charge was launched by HMRC in 2019 to recoup tax losses as a result of people using disguised remuneration schemes to reduce the tax they owe.
This was originally dating back to April 1999, but has since been changed to take in outstanding loans made on or after 9 December 2010. These have been described as tax avoidance schemes, even though they were often recommended by accountants or financial advisers.
The schemes meant that people could have their income paid in the form of a loan, which usually involved a company using the services of a self-employed worker and paying the money into another umbrella company. This firm would then ‘loan’ the cash to the worker.
While the worker would pay interest on the loan, it meant they didn’t have to pay National Insurance contributions (NICs) or income tax – which works out as a much cheaper deal. HMRC argues that these loans were never intended to be repaid – and therefore were never really loans at all. Therefore, the loan income should not be different from any other form of income and should be taxable.
Latest changes to the loan charge
- 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 a reasonable disclosure of the use of the tax avoidance scheme was made to HMRC and HMRC did not take action (for example, opening an enquiry into an Income Tax return)
- The option for individuals to elect to spread the amount of their outstanding loan balance (as at 5 April 2019, recalculated in line with the above changes) evenly across 3 tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021 – the option was added to give greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of tax.
- HMRC will refund certain voluntary payments (known as ‘voluntary restitution’) already made to prevent the loan charge arising and included in a settlement agreement reached since March 2016 (when the loan charge was announced) for any tax years where:
- the loan charge no longer applies (loans made before 9 December 2010)
- loans were made before 6 April 2016, and a reasonable disclosure of the use of the tax avoidance scheme use was made to HMRC and HMRC did not take action (for example, opening an enquiry into an Income Tax return)
The package also includes a number of changes that will give customers additional flexibility over the way they pay:
- If you do not have disposable assets and your income is less than £50,000 in the 2017 to 2018 tax year, HMRC will agree time to pay arrangements for a minimum of 5 years
if your income is less than £30,000 in the 2017 to 2018 tax year, we’ll agree a minimum of 7 years.
- If your income is more than £50,000 in the 2017 to 2018 tax year, or you need longer to pay, you’ll need to provide HMRC with detailed financial information
- There is no maximum time limit for a time to pay arrangement – if you need to agree a payment arrangement, you should contact HMRC.
- In line with existing practice, if you need time to pay, you’ll pay no more than 50% of your disposable income, unless you have a very high level of disposable income – the amount you pay into an arrangement each month will depend on your own individual circumstances.
Most recently, in December 2020, the House of Lords’ Economic Affairs Committee called on HMRC to increase action against those selling tax avoidance schemes after a report found between 20 and 30 known promoters are still active in the UK market.
The committee said that while HMRC has spent ‘considerable time and resources’ focusing on individuals who participated in the schemes, such as with the loan charge, it has allowed some who promoted the schemes to continue to operate without consequence.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.