Loan charge – decision day looms
HMRC recently announced that anyone with income under £30,000 coming forward to settle outstanding liabilities will now be offered up to seven years to pay, no questions asked. This may encourage more low-income workers to take the final step and contact HMRC. In this, the latest in our current series of articles intended to try to help explain the loan charge and settlement options, we look at what we think are the remaining areas of concern for lower income workers.
HMRC previously agreed that those earning under £50,000 could repay amounts agreed under the settlement process over five years. This has now been extended to seven years for those earning under £30,000. If circumstances require it, HMRC may be able to accept payment over a longer period. To take advantage of the £30,000 offer, you must no longer be using any sort of contractor loan or similar scheme. Please be aware however, that you will be charged forward interest on instalments, so the longer the payment plan you agree, the more interest you will pay in the long run.
HMRC’s updated guidance that contains details of the new offer can be found on GOV.UK.
In this article, we look at the following areas:
Isn’t the loan charge being scrapped? What’s the point of settling?
I’ve heard there are delays at HMRC’s end– my case will never be processed in time!
I’m worried I’ll find the settlement paperwork too complicated
Will l have to pay inheritance tax as well as income tax?
I’ve heard I’ll have to pay a deed of release on top of what I have to pay HMRC to settle?
Can I just face the loan charge?
The government recently announced a review of the effects of changes to the offshore time limit rules, to be completed by March 2019. The review also requires a comparison with other time limits, including those relating to the loan charge. However, this review is extremely unlikely to lead to any changes to the law relating to the loan charge and its application from 5 April 2019.
Indeed, any changes to the loan charge, whether through Parliament or via legal challenge, will not stop HMRC seeking to settle any tax avoidance disputes using other powers available to them in most of the cases we are concerned with (such as lower paid workers who got caught up in umbrella schemes in more recent years).
For these reasons, if you may be affected by the loan charge, you should still consider speaking to HMRC at the earliest opportunity to understand your options. It is important that you do not decline to come forward because of exaggerated expectations of what may come out of the review.
We are aware that some people have faced delays waiting to hear from HMRC with regards to settlements. HMRC have previously assured us they are increasing the number of staff to deal with cases as quickly as possible, but further delays may occur as the 5 April 2019 deadline approaches.
HMRC have recently indicated that those who provide all the required information before 5 April 2019 and respond promptly to any further requests or queries, will not be disadvantaged if a settlement is not finalised before the loan charge comes into effect.
If you want to settle, there is still time, but you need to act quickly and get all the relevant information to HMRC before 5 April, remembering that HMRC may have some queries around what you provide them in the first instance. Please note that phoning HMRC on 4 April 2019 to ask for a settlement pack, will not count!
With regards to cases already in progress, HMRC say that anyone who approached them, in advance of 30 September will receive a substantive response by the end of February, and those that have approached them since then will receive a response during March – they are now taking between 4 to 6 weeks from receipt of the required information, to get a settlement calculation out the door.
Once you contact HMRC to register your intention to settle, you will be sent a settlement pack. The settlement pack asks for information about you and your situation to enable HMRC to calculate the amount they consider you need to pay to settle. It is basically an excel spreadsheet with sections on:
- Individual information (name, National Insurance number, etc.)
- Tax avoidance scheme information (scheme name, loan amounts, etc.)
- Instalment information (whether you want a ‘no questions asked’ time to pay, etc.)
- Additional information (such as income and expenses if you want an ‘enhanced’ time to pay)
HMRC would prefer you to use the spreadsheet if you can, as it is designed to be used with their automated system, to speed up the settlement process. However, if you need to provide additional information, you find you are stuck on a section or just cannot complete the settlement pack, you should let HMRC know straight away.
In order to reach a settlement, the main thing that HMRC need to know is how much income you received in the form of untaxed ‘loans’ and when. So if all else fails, it may be that you can give them this information in another format, such as in a letter or by email.
The settlement pack does not have a ‘free form’ box for other comments but you should try and make your HMRC case handler aware of any additional information that will help them understand your circumstances, including things that will affect your ability to repay.
We appreciate that this is probably one of the most confusing aspects of what is happening. You may think of IHT as being something related to death and it may never have been mentioned to you as being relevant to a loan scheme.
Broadly, IHT is payable when there is a transfer of value. It is payable on death because on death you make the ultimate transfer of value – everything you leave behind will be transferred to other people.
But it is also payable in certain other circumstances where there is a transfer of value. The loan arrangements you were involved in, may have seen a transfer of value into a trust – when money was put into it (in the form of your untaxed income) – which was then loaned back to you.
As such, for some types of trusts, every ten years (from the creation of the trust), HMRC levy a one off inheritance tax charge based on the value of the trust if it is above the inheritance tax threshold (called the nil rate band, which has been £325,000 for many years). This is levied at a maximum of 6%, although is frequently less.
There can also be inheritance tax ‘exit’ charges when there is a transfer of value out of a trust for example, where the trustees make a payment to a beneficiary. Note that a loan isn’t recognised as a ‘payment’, because theoretically, it will be paid back to the trust at some point. However, if/when the loan is ‘written off’, then there will be a transfer of value out of the trust which can give rise to inheritance tax. Whether a charge will arise, and how much, depends on the type of trust and amounts involved. We look at this some more in the next section.
Under normal circumstances, ten year and exit charges are payable by the trustees, but in some circumstances, HMRC can seek payment from other people who were involved with the trust, instead.
In many loan charge cases, although IHT could be due, there will be none to pay. However, HMRC will only be able to confirm this once they have looked closely at the exact set up of the scheme you were involved in and the type of trust that was used. Even if there is some inheritance tax to pay, then this is likely to be modest, so things may not be as bad as you think.
LITRG has become aware that some loan providers/trustees appear to be requiring individuals that have settled/are considering settling, the chance to pay an amount to cancel the loan/have the loan formally written off – either as a flat fee or as a percentage of the loan, say 5%.
The implication in some of the loan providers/trustees’ communications we have seen, seems to be that HMRC require you to do this before they will consider your tax affairs fully regularised.
The actual situation is as follows:
HMRC will calculate any IHT charges relating to loans that have ‘crystallised’ and will include these charges in the settlement they reach with you. However if you remain involved with the trust, there could be IHT charges that arise in the future that HMRC just can’t take account of now (e.g. future ten-year charges).
If you want to finalise all of your liabilities arising from use of a loan scheme and ensure that no IHT charges arise in future, you could arrange with the trust for all of the loans to be written off now. HMRC ask you to confirm whether you plan on doing this in the settlement pack. If you do not arrange with the trust for all the loans to be written off now, then HMRC ask you to tell them this also, so that the IHT position can be kept under review.
HMRC say in their Spotlight 48 that if you decide you want to arrange for all the loans to be written off, and tell them that you plan to do this in the settlement pack, then they will essentially take your word for it. HMRC do not require any proof whatsoever that the loans have been formally extinguished and you do not need to provide them with any type of ‘deed of release’.
In terms of whether you can be compelled to pay something to the loan providers/trustees for any other reason or whether there are any other consequences of cancelling the loan/having it written off, you should seek legal advice.
You may be tempted to just face the loan charge, which will apply from 5 April 2019, but we suggest that you do so only after careful research and with a full understanding of what this entails.
HMRC have some official information on the loan charge and have published a Q & A on the Contractor UK website (links below), which you may find useful. However, HMRC’s guidance on how they will practically deal with loan charge cases is evolving, so you should keep an eye out for any developments.
What we do know is that the loan charge brings into the charge to tax, as one lump sum in the tax year 2018/19, all the loans made on or after 6 April 1999, that remain outstanding on 5 April 2019. This means it could trigger higher rates of tax, student loan repayments or cause loss of the personal allowance.
As this income is classed as employment income, theoretically the employer concerned should process it through the payroll and pay the associated tax and National Insurance over the HMRC. However, this is unlikely to happen in many cases, as the employers are often based offshore or have ceased to trade.
Where an employer is onshore and still exists, you need to notify the employer (or former employer) of the amount of any outstanding loans on which no settlement has been made, by 15 April 2019, so they can process the correct amount through the payroll. If you do not know the amount of your outstanding loans you should make an estimate of the amount, for example, by looking at the flow of money into your bank account. You must make sure that your estimate is as reasonable and accurate as possible and that the employer is aware it is an estimate. You may also need to tell HMRC about the amount separately and put it in a 2018/19 tax return. HMRC will be writing to people in due course with more information on these notification requirements.
Where an employer is offshore and no longer exists, you must put the amount of your outstanding loans in a 2018/19 tax return but also tell HMRC about them separately, by 30 September 2019 – we understand this is likely to be via an online form on GOV.UK.
It is worth noting that HMRC will be running a compliance process to ensure that they have the correct loan charge ‘returns’ from the people they expect to get them from – this will include people that they have not managed to write to yet.
The loan charge will usually be payable in line with the normal tax return process – meaning any tax due will need to be paid by 31 January 2020. Provided any tax is paid by this date, there will be no interest or penalties.
Please note that if you have loans taken out in any earlier years under enquiry, HMRC will still seek to agree or assess those years. This can mean that if the amount due would have been more than under the loan charge they can seek the higher amount.
With regards to hardship cases, we are unaware whether any special arrangements will be made available (such as the 5 year ‘no questions asked’ payment plans, made available under settlement). However, at the very least, HMRC should deal with loan charge cases in line with their general strategy, which means that payment arrangements should be available and that vulnerable taxpayers should be given special consideration.
Finally, on benefits, our understanding is that it should not impact tax credits and universal credit but it could trigger things like the high-income child benefit charge and stop access to tax-free childcare.
Although many low-income workers may be better off by settling, in some cases, you might be better off paying the loan charge. For example if you were only in a loan scheme for a short period of time and your income is from one year only, you may pay less tax under the loan charge than if you settle, as interest/penalties on late payment will not be due (although forward interest for any time to pay arrangements will be due). You will also have the cash flow benefit of not having to pay until 31 January 2020. You need to weigh things up carefully.
However, coming forward to seek settlement with HMRC (while you still can before 5 April 2019), will at least provide you with choice. We would reiterate that you aren’t really disadvantaged by at least talking to HMRC. There are a number of options open to HMRC in coming to a settlement sum and in arranging repayment of any money due. However, any settlement contract will only be binding once signed by the person. You can walk away from discussions at any point before then.
HMRC Q&As published, including how to estimate the tax on the loan charge if you don’t settle:
We recommend that you read this article in conjunction with the other main articles LITRG have put out on this topic:
Are you affected by the Loan charge – help is available? – an article that looks at the background to the loan charge, what is happening and where people can get help.
Loan charge settlement – separating fact from fiction – an article in which LITRG provide more information on the settlement process and some worked examples of likely settlement figures v loan charge figures.