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Loan charge review – an update
The loan charge review was originally expected to report in mid-November. Due to the general election on 12 December, the report will now be delivered to the new Government on its formation instead. It could therefore easily be January before any decisions are made. As a result, HMRC have published updated guidance announcing new obligations for many people in the settlement process.
When will the independent review now be published?
The general election on the 12 December means that publication of Sir Amyas Morse’s independent review of the loan charge will now be delayed. The Government’s letter to Sir Amyas Morse stating that his report should be submitted to the new Government on its formation can be found on GOV.UK.
The Chartered Institute of Taxation, of which LITRG are a part, has urged Treasury Ministers to review and respond to the review within days of the new Government being formed.
The delay creates much more uncertainty overall, which is a regrettable consequence of the election, but it also leaves only a very short, potentially problematic, window before 31 January 2020.
How have HMRC responded to the delay?
HMRC have published updated guidance for those potentially affected by the loan charge on what they should do. Unfortunately, these changes to previous guidance were not highlighted on GOV.UK, nor specifically communicated to those affected. However, they announce new obligations for many people in the settlement process.
The new guidance states:
‘HMRC recognise you may want to wait for the government’s response to the review before finalising your settlement. You will need to report the loan charge on your tax return if your settlement is not finalised by 31 January 2020. Reporting your loan charge will not prevent you finalising your settlement. Once your settlement is finalised you can amend your tax return if necessary.’
Why do I need to do anything, if the outcome of the review is not yet known?
Currently, the loan charge legislation is in force as originally enacted and results in those affected, who have not made settlements, having reportable income as a result of their outstanding loans. HMRC’s announcement reflects the position that this requires submission of a tax return for the 2018/19 tax year, incorporating the loan charge.
Of course, the law regarding the loan charge could be altered as a result of the review. However, it is not known what changes might be recommended by the review and whether the Government will accept them. There is also the possibility of further delay in publishing the review or announcing any changes.
It is therefore important that you are aware of these newly announced obligations so you can make an informed decision about your next steps.
What if I reach settlement with HMRC before 31 January 2020?
If you do agree settlement with HMRC before 31 January 2020, that will largely be the end of the matter (provided you go on to pay what you agree) – unless, of course, there are retrospective changes made to the loan charge legislation.
What if I can’t reach settlement with HMRC before 31 January 2020?
Whether HMRC are still working on settlements behind the scenes or not, there are, in any case, questions over HMRC’s practical ability to process all settlements before 31 January 2020.
If settlement is not reached by 31 January 2020, whether due to delay on the part of HMRC or because you have chosen to pause settlement discussions pending outcome of the review, then HMRC’s updated guidance will apply. This says that you will have to report the loan charge on a Self Assessment tax return and then, once the settlement process has been completed, amend it (to remove the loan charge).
I have never completed a tax return before, what do I need to do?
You will need to register for Self Assessment.
Once you register for Self Assessment, you are given up to three months from the date that HMRC sends you a notice to file a return to submit it. Although this may take you past the usual 31 January 2020 filing deadline, there should be no adverse consequences, provided you subsequently agree a settlement.
This is because penalties can ultimately only be charged in this scenario (assuming you actually file the tax return by the later date given), if there is some tax owing as at 31 January 2020. If you successfully reach a settlement with HMRC, you will then be able to amend your tax return to exclude the loan charge, and may not therefore – ultimately – owe further tax.
We explain how, exactly, to report the loan charge in the tax return in our previous news piece.
If you reach settlement before the return is due, you may be able to ask HMRC to cancel the notice to file the return.
What do I need to be aware of if I submit a tax return containing the loan charge, then submit an amended tax return to remove it?
The original tax return that is submitted, will contain loan income which will generate a 2018/19 tax liability – with a technical due date of 31 January 2020. If that liability is not paid, you should be aware that you may receive computer-generated letters and notices about the late payment, until your position, as set out on the amended return, has filtered through HMRC’s systems.
There may be other consequences as a result of your tax return containing loan income - it is therefore important that you file the amended tax return as soon as you are able, to limit the window within which these issues may occur.
Is it necessary to follow this updated guidance?
This is obviously a new, quite onerous requirement (particularly for those who are not already in Self Assessment) and we have raised our concerns with HMRC as to whether alternative arrangements can be made for those in the settlement process, without the need to file a tax return and then amend it.
Until then, HMRC’s guidance remains in place and it is a matter for you (and your adviser if you have one) to decide whether (and then, when) to register for Self Assessment given all the uncertainties that currently exist. If you do, you should make sure that you understand the various deadlines and obligations associated with Self Assessment as there can be penalties for getting things wrong.
It is also unclear at this stage, whether HMRC could somehow manage to switch off their automatic communications and processes for those filing ‘interim’ tax returns or take any other steps to alleviate some of the potential problems highlighted in the question immediately above.
You should check back to our website regularly, for updates.
What if I don’t go on to settle?
In this case (and in the case of those who are not in the settlement process), a 2018/19 tax return containing the loan charge is due by 31 January 2020. This is the case even though you may only decide that you aren’t going to settle until after 31 January 2020. You should read the guidance below for more information.
I am not in the settlement process – do I need to do anything?
If the loan charge applies to you, then you should have already completed an additional information return – the deadline was 30 September 2019. If you have missed this deadline, the return can and should still be completed. See our recent FAQs on the additional information return, for further help and guidance.
You also need to report the loan charge on your tax return. For those not already in Self Assessment, the deadline for registering for a 2018/19 tax return was 5 October 2019. If you have not met this deadline, you should register straight away using form SA1, which you can find on GOV.UK.
In this case (and in the case of those who are in the settlement process but who subsequently do not go on to settle, referred to above), there is a risk of penalties for ‘failing to notify’ HMRC on time that you needed to complete a 2018/19 tax return.
Penalties are based on the tax that could potentially be lost as a result of the failure to notify on time. Where the 5 October deadline is missed, a person should still register as soon as possible. As long as any tax due is paid on time (normally by the following 31 January), there will be no potential lost tax revenue and thus no penalty to pay.
We are unsure whether HMRC’s practice is to pursue failure to notify penalties where people have not paid the tax due on time but have arranged a payment plan – we will try and confirm this with HMRC as soon as possible. In any case, HMRC may still not apply penalties – for example, given the confusion and late changes in this area, you may be able to demonstrate that you have a ‘reasonable excuse’ for failing to notify.
Note, if your liability to the loan charge changes as a result of the Government response to the review you can amend the figures on your tax return for 2018/19 as necessary (which will also affect any failure to notify penalties charged).