Loan Charge Review Update

HMRC loan charge
Jan
3
Posted 2020 by Chris Davies

HM Treasury issued, just before Christmas, a long-awaited response to an Independent Review (“the Review”) of the Disguised Remuneration Loan Charge, with a withdrawal from its previous hard line of application. The Review, commissioned by the Chancellor and undertaken by Sir Amyas Morse, runs to a published Report of no fewer than 83 pages.

Background

Legislation found in Part 7A of Income Tax (Earnings and Pensions) Act 2003, more commonly known as “The Loan Charge”, was/is designed to tackle disguised remuneration tax avoidance schemes, which often sought to treat a person’s salary or income from their employment, as a loan which would leave an outstanding obligation that was unlikely to be repaid.

The Government, and HM Revenue & Customs (“HMRC”), had said it always considered these schemes did/do not work, that wages paid in this way had always been taxable, and that the underlying tax avoidance behaviour is unfair to the 99.8% of taxpayers who did not use these schemes.

The Loan Charge was introduced in December 2010, following what had supposedly been 20 years of action against these schemes, which continued to proliferate and be used. It is highly debatable whether HMRC has taken action over 20 years or not, in some if not most cases and we have to suggest that this is not the case in individual circumstances. The Review also found that HMRC’s publishing and application of this view was inconsistent.

Tragically, the cost of the loan charge has been far greater than monetary value, with the threat and pressure of severe tax debt driving some taxpayers to take their own lives.

Following significant lobbying, the Government recognised the concerns raised that the Loan Charge was unfair. The Review considered responses, to a call for evidence, by 37 prominent tax and legal professionals alongside over 700 personal taxpayer testimonies provided via the Loan Charge Action Group (“LCAG”).

Government Response to Review

In response to the Review the Government has stated as follows:

  • The Loan Charge will only apply to loans made on or after 9 December 2010, in line with Disguised Remuneration legislation being introduced.
  • The Loan Charge will not apply to loans made before 6 April 2016 where full disclosure of the arrangement was made and HMRC did not open an enquiry. The meaning of what is “fully disclosed” will be set out most likely in the forthcoming Budget Report.
  • Payment of the Loan Charge can be spread evenly across three tax years, and flexible payment plan terms will remain.
  • Taxpayers who settled with HMRC by making “voluntary restitution” in lieu of the Loan Charge for the years before 9 December 2010 (or qualifying periods before 6 April 2016) will be repaid by HMRC!
  • The filing of 2018/19 tax returns can either be made by the normal due date of 31 January 2020, or 30 September 2020 without incurring any late filing penalties or interest on payment of the tax from the normal due date of 31 January 2020.

This is likely to leave a bitter taste in the mouths of a significant number those affected, but will come as a relief to many who were early into these arrangements. LCAG is likely to continue to pursue a full removal of the Charge based on its perceived retro-activeness, and at least one prominent tax barrister, Keith Gordon, has also committed to advocate in favour of complete removal of the historic Charge.

If you would like to discuss your 2018-19 position and are unsure what to do with regards your Tax Return, then please do not hesitate to contact us.