(Updated 7th January 2019) The 2019 Loan Charge is another effort by HMRC to recover taxes it deems to be owed by thousands of people who have used disguised remuneration schemes since 1999. Read about the 2019 Loan Charge, its implications and your potential options if you are affected*.
Read our latest update on the 2019 Loan Charge.
What is the 2019 Loan Charge?
The 2019 Loan Charge is a way for HMRC to retrospectively collect taxes that taxpayers (mostly self-employed) allegedly avoided through disguised remuneration, including contractor loan schemes. HMRC is looking to collect taxes from anyone who used a disguised remuneration scheme from 6th April 1999.
Where an individual would have received their income through a loan scheme that falls within the scope of this legislation, the individual who benefited from the loan will be subject to a special tax charge from 5th April 2019. This ‘loan charge’ could cause financial hardship for thousands as it adds all the individual’s loans together and taxes them in one year. HMRC will require this tax to be paid by 31st January 2020 – the deadline for self-assessment tax returns – unless the affected parties come forward to settle before the charge comes into effect.
‘Financial distress and bankruptcies…”
MP Stephen Lloyd previously launched an Early Day Motion (EDM) against the 2019 Loan Charge, arguing that it is unfair to retrospectively tax individuals who used these schemes which were technically legal at the time.
To assume that all taxpayers were aware of the unethical practice of loan schemes has been seen to be unfair as in many cases these schemes were recommended by third-parties.
Lloyd stated that the charge “is likely to cause financial distress and bankruptcies…” as some amounts HMRC deems owed by taxpayers could be in the tens of thousands. There have been reports of contractors feeling the stress and pressure of the imminent loan charge, and there have been calls to set up helplines for those in distress.
The Loan Charge Action Group (LCAG) is working to launch a Judicial Review to allow courts to decide whether collecting tax through the Loan Charge is lawful.
How does it work and what counts as disguised remuneration?
HMRC will be treating all loans meeting the criteria as income on 5th April 2019, taxing them all the current tax rates at once rather than the rates at the time each loan was entered into or used. HMRC may also request additional payment in the form of late payment interest, National Insurance, penalties and Inheritance Tax where applicable.
Here is a simple example of disguised remuneration through a loan scheme:
- A contractor engages a payroll provider or accountant who recommends a way in which they can pay less tax
- The contractor is paid £5,000 for a month’s work
- An engagement occurs between the contractor, payroll provider/accountant and a loan scheme such as an Employee Benefit Trust (EBT)
- The EBT reduces the contractor’s tax liability by taking the £5,000 and paying it back to the contractor as a loan, with the understanding that the loan will not be repaid
- As it is a loan the £5,000 is not taxed – the EBT will take a percentage as their fee
This scenario is often more complex; for example – the use of a loan scheme occurring over a number of years, amassing thousands in unpaid tax. Other factors to consider include any interest accumulating on the loan, accelerated payment notices by HMRC and any existing investigations.
What do you do if you are affected?
If you discover that you used a loan scheme or other disguised remuneration scheme from 6th April 1999, you have a few options to consider:
- Register to settle your tax affairs – a settlement will allow you to prevent the Loan Charge applying on 5th April 2019 and pay the tax owed. The difference between settlement and the loan charge is that the loans will be taxed in the relevant years they were used rather than taxed all together at the current rate. You can still register your interest to settle, but you have a better chance of reaching a settlement agreement the sooner you contact HMRC.
- Repay the loan (in money) before the loan charge comes into effect.
- Pay the 2019 Loan Charge when it comes due.
Third-party loans made from 6th April 1999 will become taxable on 5th April 2019 – plus interest if HMRC has raised an enquiry. You will have until then to come to an arrangement.
As of 1st January 2019, it is no longer possible to postpone the loan charge. Both HMRC and the Freelancer and Contractor Services Association (FCSA) recommend settling your tax affairs if you are affected. Where possible, there may be an option to come to a payment arrangement – but this is only feasible where you have registered to settle.
Do not ignore the Loan Charge. If you are currently using a disguised remuneration scheme, it is best to remove yourself immediately and use a compliant provider.
Seek advice on the 2019 Loan Charge
If you believe you will be affected by the 2019 Loan Charge, it may be best to seek professional legal advice before taking any action. There are solicitors in the UK who can review your position and help you take the appropriate course of action for your circumstances.
Please note, as a professional contractor accountancy firm Churchill Knight & Associates Ltd is not offering advice, legal or otherwise, on the 2019 Loan Charge. We can explore your payroll options and help you maximise your take home pay legally as a compliant and regularly audited accountancy and payroll provider.
Contact us to explore your accountancy and payroll options.
If you are in distress
If you are experiencing feelings of anxiety or depression as a result of the potential consequences of the 2019 Loan Charge, speak to a loved one or contact Samaritans. The Samaritans charity is run by experienced volunteers who are there to listen and help you talk through your concerns and worries.
Visit Samaritans.org for more information.
*This document is not a substitute for specific legal, accounting or other professional advice or opinions on related matters and issues that arise and should not be taken as providing specific advice on any of the topics discussed.
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