27th January 2020
By Chris O’Hara, tax expert and partner of Leonard Curtis – providers of the Lifecycle network
The introduction of the controversial Loan Charge in April 2019 has been high on our agenda for a while and, all in all, we welcome the recommendations made by Sir Amyas Morse in his independent review of the Loan Charge, the majority of which have been accepted by HM Treasury.
The review was commissioned on the back of feedback from hundreds of those personally affected by the Loan Charge, together with MPs, experts, campaigners and legal and tax professionals. I personally met with MPs and Lords at the Houses of Parliament. I also met with Sir Amyas – adding my experience and thoughts into the report and I am one of only a handful of advisers to be acknowledged in his report.
Sir Amyas’ review certainly wasn’t the whitewash that so many had feared and the acceptance of many of his key recommendations will be a big boost to those affected. It is also worth noting that he is highly critical of HMRC’s bullying behaviour in demanding what are so often life-changing and potentially life-ruining sums of money.
On the face of it, the accepted changes are favourable for some of the 50,000 or so who were paid in the form of non-taxable loans during a two-decade period – from 6th April 1999 to 5th April 2019.
However, all is not quite as clear cut as it seems so we must proceed with caution and await further developments, not least the publication of HMRC’s revised settlement terms. However, my concern would be that HMRC gives with one hand and takes with the other – either by way of existing or new legislation, or simply the issue of guidance open to interpretation.
Certainly, HMRC will wish to offset any shortfall in its expected yield from loan schemes and to be seen to not be letting users go unpunished. How this manifests itself, however, waits to be seen – but it is definitely a case of watch this space.
It’s also important to remember that, for the years in which loans were made, paying the associated charge doesn’t necessarily resolve the underlying tax dispute with HMRC. Tax years that are subject to an open enquiry will still need to be dealt with, either by settling or embarking on legal action.
And, whilst it’s potentially good news for some, we must also remember that HMRC won’t be able to revisit previously settled cases and process any refunds until changes to the Loan Charge legislation have been enacted by Parliament and become law, which will probably be at some point this summer.
So, let’s take a look at the key changes and what they mean for you and your clients.
The Loan Charge will apply only to outstanding loans made on, or after, 9th December 2010
The biggest recommended change to the Loan Charge is that it should not apply to loans made before 9th December 2010.
As previously stated, this is good news for some but there are likely to be tens of thousands of others for whom the picture remains unchanged.
The Loan Charge will not apply to outstanding loans made between 9 December 2010 and 6th April 2016, where the avoidance scheme was fully disclosed to HMRC and an enquiry was not opened
Again, on the face of it it’s good news. However, much will hinge on HMRC’s definition of “disclosure” and how high it wishes to set the bar. Certainly, this has always been a contentious issue and I would not expect it to change now.
Outstanding loan balances – as at 5th April 2019 – can be recalculated in line with the changes and spread evenly across three tax years
For those who remain liable to the Loan Charge, they can now elect to spread the amount of their outstanding loan balance evenly across the three tax years – 2018/19, 2019/20 and 2020/21.
This will give greater flexibility on when the outstanding loan balance is subject to tax. It may also mean that the loan balance is now subject to lower rates of tax and provide some consolation to those who would otherwise struggle to repay if they were to be taxed in one lump sum on 5th April 2019.
HMRC will refund voluntary payments already made
As a consequence of the review’s recommendations, HMRC has agreed to refund those who had already voluntarily paid HMRC for years where the charge no longer applies.
As we’ve said earlier, any refunds will not be considered until after the revised Loan Charge legislation has received Royal Assent. However, those who anticipate a refund should be wary of any unintended consequences. For example, triggering a future PAYE / NIC charge and / or Inheritance Tax charge on closing the scheme down.
Greater flexibility on time to pay
The review also calls for HMRC to honour its original commitment when it comes to protecting vulnerable taxpayers.
So, for those who don’t have disposable assets and who earn less than £50,000, HMRC will agree Time to Pay arrangements for a minimum of five years. For those who earn less than £30,000, HMRC will agree payment terms over a minimum seven year period.
In addition, those who need time to pay won’t have to part with more than 50% of their disposable income, and no one will be forced to sell their main residence, access their pension pot or be pushed into bankruptcy to settle outstanding charges.
Companies settling schemes at the corporate level will also be offered favourable payment terms of possibly 10 or more years. As is the case now, each will be treated on its merits and will be subject to HMRC being satisfied that the company does not have the means to pay in full. It will, however, have to demonstrate that it can meet the scheduled repayments over the agreed term.
2018/19 self-assessment tax returns due by 31 January 2020
For those who have not yet filed their self-assessment tax return for 2018/19 – or has a settlement agreed – HMRC has extended the filing deadline to 30th September 2020.
In doing so, any late filing penalties or interest, along with late payment for the period 1st February 2020 to 30th September 2020, will be waived – as long as a return is filed and tax paid or a settlement agreement reached with HMRC by 30th September 2020.
Those affected should seek the advice of their tax adviser over whether to file their return by the normal due date of 31st January or avail themselves of the additional time to settle their affairs ahead of the revised end of September deadline. Those who choose the former should use the additional notes space on their return to explain the position being taken.
So, what happens now?
HMRC has just issued guidance and contacted those affected to communicate the draft statutory changes it believes are required to introduce legislation to implement the approved amendments. However, until HMRC issues full guidance – its latest settlement terms and the draft legislation remain subject to parliamentary review – the full impact of the accepted changes is unknown.
HMRC currently has a moratorium on settling cases which will be lifted once it publishes its revised settlement terms, which we expect to be in early February 2020.
Any accountants who are unsure of the position and best steps to take in relation to any of their clients who are affected by the Loan Charge should get in touch with us at firstname.lastname@example.org or call 0330 0243 999. Alternatively, join the Lifecycle network here.