December 2019 Update – the Treasury has published its response to the Loan Charge review lead by Sir Amyas Morse. It has decided to issue charges only for loans taken out via disguised remuneration on or after 9 December 2010, rather than April 1999. It has also said there will be different actions taken to tackle tax avoidance schemes before 2010, as well as new actions brought forward for promoters of tax avoidance.
It was originally thought that the review of the Loan Charge would be postponed until results of the General Election had settled. However Sir Amyas Morse concluded his review and made recommendations based on his findings, published on 20th December 2019. One such recommendation was to change the date so that only loans taken taken out on or after 9th December 2010 would suffer the loan charge. This recommendation was accepted by the Treasury.
Furthermore, the government has said it will not apply further action to loans taken out between 9 December 2010 and 5 April 2016, where the taxpayer fully disclosed the scheme on their self-assessmnet and HMRC failed to take action.
These changes, the government says, will reduce tax bills for more than 30,000 individuals who are currently subject to the Loan Charge.
Visit the government’s website to read more about its response to the independent Loan Charge review.
November 2019 Update – the much anticipated second review of the Loan Charge has now been postponed. The review, led by Sir Amyas Morse, was intended to assess whether the Loan Charge was the right way of dealing with people who avoided tax via disguised remuneration and loan schemes between 6 April 1999 and 5 April 2019.
Chancellor Sajid Javid asked for the second review, after the results after the first Loan Charge review left many disappointed. The loan charge could leave many taxpayers bankrupt or with devastating tax bills, despite HMRC claiming to offer reasonable payment plans for those who choose to settle with them.
The delay of the review publication is said to be due to the General Election on 12th December – and if there is a hung parliament as is suspected, the review report could be delayed dangerously close to the deadline for settling loans (January 2020). The Telegraph reported that around 8,000 of those affected by the loan charge have settled, resulting in £2 billion in tax collections for the Treasury.
HMRC has said that the Loan Charge will stay in effect while the review is ongoing.
January 2019 Update – The Treasury minister has promised to review the loan charge by March 2019, citing campaigners such as The Loan Charge Action Group (LCAG) that claim the charge will bankrupt thousands of affected contractors.
The LCAG is already hoping for a Judicial Rview to challenge the lawfulness of one of the government’s most brutal efforts to tackle disguised remuneration. However, the schemes in quetion – which involved taking out loans which were never to be repaid – were technically legal at the time, and still are to this day.
MP Ed Davey said in the House of Commons on 8th January 2019 that introducing laws that makes illegal what individuals did many years ago “offends against the rule of law” and is a “gross misery”.
These loan schemes were at the time recommended by some of the top accountancy firms in the UK. While some may argue that contractors should not have been naive to think a loan would never need to be repaid, it is unfortunate that many individuals – who could have been new to contracting – fell into these traps which actually were legal at the time.
If you are affected by the loan charge, or want to find out more, read our 5-minute loan charge guide.
HMRC will apply the ‘2019 Loan Charge’ to disguised remuneration loans issued since 6 April 1999 that are still outstanding on 5 April 2019. This is to recoup tax avoided during this time by individuals who engaged in disguised remuneration schemes.
The LCAG’s aim is for the loan charge to be prohibited by Judicial Review.
Could a Judicial Review stop the 2019 Loan Charge?
The Loan Charge Action Group (LCAG), which is behind the pledge to launch the Judicial Review, faces a £1 million legal challenge.
A Judicial Review will check whether the decision to implement the charge is a lawful one. If the court finds that levying a fine against affected contractors is unlawful, it can issue an order to stop the Loan Charge.
The court however cannot legally enforce a decision on the defence (HMRC), but it’s said to be rare for a public body to act against an order of the court.
In order to reach High Court, the LCAG first need to raise £500,000. Then an additional £500,000 will be needed to potentially go through the Supreme Court and Court of Appeal. The whole process could take several years.
The LCAG cited section 6 of the UK Human Rights Act 1998, arguing that the Loan Charge is ‘an infringement of the right of individuals to peaceful enjoyment of their possessions (including their cash)’.
There is also a moral issue to consider. Thousands of contractors could have been unaware of the tax avoidance implications of taking out loans now considered to be ‘disguised remuneration’. Furthermore, contractors may have been told by dodgy payroll providers that using a loan scheme is completely safe and without recourse.
It’s also unlikely that all those affected will be able to simply hand over thousands of pounds to cover the loan charge or even repay the loans. This fact is already known to have led to feelings of distress, anxiety and in some cases depression.
HMRC has given those affected by the Loan Charge the option to register to settle their tax affairs.
If you want to settle your tax affairs
If you used a disguised remuneration loan scheme after 6th April 1999, you still have the option to settle your tax affairs. If you wish to settle, you are urged to contact HMRC sooner rather than later to increase the chances of reaching a settlement agreement before the loan charge is applicable.
Settlement terms will be dependent on whether HMRC classes you as a contractor, employer or employee. Contractors include those who provided services through an umbrella company, an agency or a Personal Service Company (PSC).
Settlement terms could include:
- Income tax on the net amount of all your disguised remuneration loans
- Late payment interest – applicable for years where HMRC has enquired or is enquiring on your tax affairs
- National Insurance Contributions if you’re a self-employed contractor
- Other penalties and Inheritance Tax where applicable
More information can be found on the government’s guidance on disguised remuneration.
Should I just pay the Loan Charge?
If you are affected and do not wish to settle your tax affairs ahead of the Loan Charge implementation, you can choose not to contact HMRC and pay the Loan Charge (if the Judicial Review does not go ahead).
Whether you choose to pay the Loan Charge and any penalties/interest associated depends on your circumstances, such as how long you were in the loan scheme, whether you colluded to avoid tax and whether the umbrella company you used to take loans still exists. The problem with opting to pay the loan charge is that all the loans and payments you took will be lumped together and taxed under one rate, rather than the tax rates applicable at the time you used the loans. This will result in much higher payments than the tax that would be applied through settlement – plus additional interest and penalties. Is it worth taking a risk on the unknown?
If you are affected by the 2019 Loan Charge and want to understand your options fully before making a decision, it is best to seek legal advice.
You can also find out more about the Loan Charge Action Group by visiting their website.
The 2019 Loan Charge is another means to an end for HMRC to clamp down on tax avoidance. Perceived tax avoidance will be a key topic in the upcoming Budget on 29th October. Contractors, contractor accountants and payroll providers will be waiting with bated breath to find out whether IR35 reform will come to the private sector.
Want to learn more about changing contractor legislation? Read our guide to preparing for changes to Off-payroll working in the private sector.