The loan charge is a measure designed to tackle tax avoidance, particularly disguised remuneration schemes. It was introduced in the Finance Act 2016 and brought in from 2019.
Disguised remuneration schemes were promoted in the wake of the introduction in 1999 of new tax law IR35 and a number of different companies, some involving lawyers or accountants, offered these schemes. Many of the providers and promoters of these schemes have now, unsurprisingly, disappeared or folded.
Broadly, if you worked for someone as a paid director, employee or on a self-employed basis and you agreed with them to receive a loan instead of any salary or wages, and the understanding was to be that you would never have to repay that loan, this is described as a disguised remuneration loan.
The aim of paying someone via a disguised remuneration loan is that you avoid tax and NIC and the employer avoids NICs. If you are self-employed, it means that you might avoid income tax and Class 4 NICs.
History of The Loan Charge
The Loan Charge was introduced in the Finance (no. 2) Act 2017 and is a charge on all payroll remuneration through loans made since 1999, in the form of a 45% charge on all loan payments in that time. This charge is levied as a back tax and demanded by HMRC in one tax year, 2019-2020. Anyone who has ever been employed through such as structure will be hit with a retrospective charge in the 2018-19 tax year in one go, meaning huge and wholly unaffordable bills.
Loan remuneration arrangements were – and still are – legal, hence being recommended by accountants and approved by lawyers. Users of arrangements were not challenged by HMRC at the time.
Key features and selling points of disguised remuneration loans were that they would be written off ‘tax-free’ on death, meaning that no tax would ever be paid on your earnings. Alternatively, if you moved abroad, the loan could ‘disappear’ with you and the offshore trust making the loan might also disappear.
However, due to the loan charge legislation, loans that were taken out under such a scheme and not paid back in full before 5th April 2019 became classed as income and would therefore be taxable in their entirety.
Before the change in legislation, those who were likely to be affected were encouraged to talk to HMRC to see if there was any way of settling past tax liabilities. If these individuals agreed to the settlements, they would not be affected by the loan charge.
Why are the sums so large?
As well as the fact that the loan charge covers a period from 1999 onwards, it has taken the form of a single demand for taxes over a number of years, plus any interest due. This means that for some people, the settlement figure has been significant. About 50,000 people are believed to be affected. Someone earning more than £50,000 a year could be looking at a bill of more than half a million pounds, and even people on more modest incomes face charges in excess of £10,000.
Are the schemes legal?
The loan schemes were not illegal but were designed to enable tax avoidance, something that was always likely to come to the attention of HMRC. Those who promoted the schemes may not necessarily have pointed out to those who made use of them that there was a risk that HMRC would seek at some point to take action.
Under HMRC’s DOTAS (Disclosure of Tax Avoidance Schemes) system, certain people must provide information about avoidance schemes within 5 days of the schemes being made available or implemented. This is usually the promoter of the scheme – the person who designs or markets it. However, the user of such a scheme must also notify HMRC.
Much depends on what users of the loan schemes were told about their duties under DOTAS. They may have been told that disclosure was not required.
However, taxpayers are legally responsible for their tax affairs, even if they took bad advice which then led them to break the law, albeit unwittingly. The only option many would now have is to make a claim against the promoter of the scheme for the losses.
Because of the length of time between the start of these loan schemes and the government taking action against them, many of those using the schemes were unaware that HMRC regarded them as tax avoidance. Support groups for those affected by the charge say this can be seen as an argument for mitigation of its effects.
A reasonable response to avoidance?
When the loan charge affects employers and those who were fully aware of what they were getting into, it can be viewed as a reasonable response to tax avoidance – even with the long period that it covers.
However, the loan charge is only intended to stop avoidance and collect tax from those using the schemes. It does not look at the reasons why individuals used these schemes or the context in which the schemes were used. Indeed, some of those caught by the loan charge say that they were misled and in some cases were told by employers that they had to enter the scheme in order to secure work.
Both support groups and certain MPs have urged HMRC to use their powers of discretion in regard to settlements as widely as possible, especially in regard to the lower paid.
What are the disguised remuneration settlement terms?
HMRC are seeking to recover income tax and Class 1 primary national insurance (employees) or Class 2 and 4 NICs (self-employed and partners) on the amount of the loans, at the marginal tax rate for the year(s) in which the loans were taken out potentially along with interest on the above amounts.
What’s new?
30th September 2020 was the final settlement date for outstanding disguised remuneration loans to which the loan charge applies.
In August 2020, HMRC issued details of a new settlement opportunity for taxpayers with loans not subject to the loan charge. See Disguised Remuneration 2020 settlement opportunity.