Loan Charge Review Recommendations Released
The long-awaited independent review of the controversial loan charge has now been published, along with the government’s response. These documents provide some much-needed clarity for taxpayers caught up with the charge.
The 2019 Loan Charge broadly imposes a tax charge on disguised remuneration loans from 1999 that remain outstanding at 5 April 2019, effectively bringing years of disguised remuneration into charge in 2018/19. Therefore, the loan charge had the punitive effect of up to 20 years’ tax becoming payable in one year.
HMRC argued this was justified as a strong stance needed to be taken against tax avoidance schemes. However, MPs and various action groups have stated the charge was retrospective in nature and may have substantial impact on taxpayers, such as bankruptcies and loss of home.
The government took note of objections and in September 2019 announced that an independent review into the fairness and proportionality of the loan charge would be undertaken, with the results expected to be published by mid-November 2019. However, the review was delayed due to the general election and the results were instead published on the 20 December 2019.
The review was undertaken by Sir Amyas Morse, the former chief Executive of the National Audit Office.
Although Sir Morse supported the essential purpose of the loan charge, he stated how it went ‘too far in undermining or overriding taxpayer protections’ and therefore he outlined several recommendations to ‘bring it back in line.’
Firstly, he believed that the loan charge should not apply to loans entered into before December 2010, as the law surrounding the prohibition of these loans only became clear at this point. Although HMRC maintained they have always said these schemes did not work, Sir Morse reinforced the idea that the taxpayer is entitled to rely on the written law over HMRC’s view.
In addition, people who received loans between 2010 and 2016 will not have to pay the charge if they made reasonable disclosure of the loans and did not receive an inquiry into their affairs. However, if no disclosure was made, the loan charge will apply from the year of first usage, regardless of whether an inquiry was launched.
Moreover, Sir Morse stated that those who used the schemes from the 2016/17 tax year onwards should continue to automatically be within the scope of the loan charge, as the loan charge was announced in 2016.
Other relevant recommendations were aimed at reducing the financial impact of the loan charge on the taxpayer, including: the opportunity to spread the loan balance over three years; a proposition that no one should have to pay more than half of their disposable income and a reasonable proportion of their liquid assets in a single year; and the view that taxpayers should not lose their house as a result of the loan charge or be made bankrupt. There is also a chance for voluntary restitution elements of settlements to be repaid provided certain conditions are met.
A final recommendation of importance is the suggestion that those earning under £30,000 in 2017-18 should have their debt written off after 10 years.
The Government’s Response
The government has accepted all but one of the recommendations, rejecting the suggestion that liability should be written off after 10 years as they believe this would mean that the people who used these schemes would be treated more favourable than taxpayers with other debts.
It was also agreed that whilst voluntary restitution should be repaid, those affected will have to wait for legislation to be drafted to do this.
How this might affect you
HMRC has provided guidance on how the changes might affect different taxpayers, however in summary:
- Individuals who have not agreed a settlement with HMRC but who believe they are subject to the loan charge should look at the updated loan charge rules and, if caught, should reflect this as accurately as possible on their 2018/19 self-assessment tax return. Whilst the normal tax return deadline is 20 January 2020, this has been deferred to 30 September 2020 for those who need more time to consider how the changes will affect them. If a request by HMRC to submit a tax return has not been made, then HMRC should be notified as soon as possible and one will be sent.
- For individuals whose settlement agreements are yet to be finalised there may be several impacts of the review. If no part of your settlement has been affected by the changes to the loan charge, it will be finalised in the normal way. However, HMRC will recalculate to account for loans before 9 December 2010 or loans made after 6 April where the loan was disclosed and HMRC did not take action. The individual then has a choice on how to proceed, which HMRC will outline by 31 July 2020 by letter.
- Individuals who have settled the loan charge in full or are paying by instalments may be entitled to a partial or full refund of their ‘voluntary restitution.’ This will be the case if the loan charge no longer applies (loans before 9 December 2010) or for loans between 9 December 2010 and 6 April 2016 which were fully disclosed but no action was taken. Those paying instalments should continue to do so and wait to be contacted by HMRC following the passing of legislation.
HMRC has pledged to set out its legislative timetable, draft legislation, and detailed guidance soon.
It is estimated that of the 50,000 people affected by the loan charge, the changes should reduce the tax bills of more than 30,000 people; 11,000 of whom will not have to pay anything at all.
UPDATE: Loan Charge Review Delayed (2 December 2019)
Government Announces Review of the Loan Charge (12 September 2019)
That Bites: The 2019 Loan Charge and Human Rights (21 August 2019)