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Loan charge changes: what they mean... and what they don’t
Guidance and draft legislation on the loan charge, following Amyas Morse’s independent review and the government response, have now been published. The headline is that the loan charge remains in place, although some changes have been made. We await further clarification on some aspects from HMRC, but here we give you some information as to what it all means…and what it doesn’t.
The review, the government response and some initial guidance can be found on GOV.UK.
HMRC have announced that those with loan charge related issues can file their tax return and pay the loan charge and any other tax due (or arrange a payment plan) by 30 September 2020 (rather than by 31 January 2020), without penalty. (You can, of course, submit it earlier if you want to, however you can still delay paying the loan charge until 30 September 2020, without penalty.)
We understand that ‘those with loan charge issues’ includes those:
- who ultimately pay the loan charge for any loan;
- who subsequently go on to settle in respect of any loan; or
- whose loan is taken out of the loan charge as a result of the review.
There is no need to tell HMRC in advance that you will be taking advantage of the extended deadline. You may however receive auto generated interest charges and penalty notices, which can be cancelled if you call HMRC on 03000 599110.
Electing to spread the loan charge (see below) will bring you within the payments on account regime. New provisions mean that those with loan charge related issues can pay their payments on account for 2019/20 (or arrange a payment plan to do so) by 31 January 2021 without penalty (as opposed to 31 January 2020 and 31 July 2020).
If you need to report the loan charge (albeit on an amended basis, because of the changes), but are not already in self-assessment, you should ask HMRC to set up a 2018/19 self-assessment record for you as soon as possible. You should also make sure that you complete the additional information form on GOV.UK. It is currently being updated and will be available from April 2020 – the deadline for completion has been extended to 30 September 2020 (those who have previously completed it, do not need to amend it even though their loan charge liability may have now changed). If you want to make the election to spread the loan charge (see below), you will need to do this via the additional information form.
If you are in the settlement process, and don’t reach settlement with HMRC by 31 January 2020, you no longer need to file a 2018/19 tax return to report the loan charge (and then file an amended return to remove it once settlement is reached).
If you are already in self-assessment for another reason, you have until 30 September 2020 to file your tax return and pay anything you owe. If you have settled your tax affairs in relation to the loan charge by then, you will not need to include any details of the loan charge on your tax return.
Please note that just because people facing the loan charge have until 30 September 2020 to make payment (or arrange a payment plan), this does not mean that those in the settlement process will automatically be able to defer their payment (or their first payment under a payment arrangement) until this date. If you need a bit of breathing space before collection starts then this is something that you will have to negotiate with HMRC.
The government accepted all but one of Sir Amyas Morse’s recommendations (we look at some of the main ones below).
The changes will go some way towards reducing the disproportionality of the loan charge. For example, if you entered loan arrangements in more recent years, although the loan charge will still apply, you can now spread your loan charge income over three years, which could save you money, especially if you are on a lower-income and don’t have any open enquiries/assessments. You may also now be entitled to an automatic payment arrangement (called a Time to Pay arrangement).
The main recommendations are:
Design of the loan charge
Recommendation: The Loan Charge should not apply to loans entered into before 9 December 2010.
This means that Sir Amyas Morse has halved the 20-year ‘look back’ period, which may or may not benefit you depending on when you entered into a loan arrangement.
This does not mean that the requirement to pay tax on these loans falls away altogether. However, HMRC are going to run another settlement opportunity in 2020 to allow any taxpayers who now fall outside the scope of the loan charge (as a result of these changes) but who may be pursued by HMRC using their ordinary powers, to settle their tax affairs (if they are not already in the ‘November 2017’ settlement process). This will largely apply to those with open enquiries/assessments for those earlier years.
Note - the ‘November 2017’ settlement window is NOT being reopened for people who still face the loan charge but who missed getting their information to HMRC by 5 April 2019.
Recommendation: Unprotected Years arising from loans entered into on or after 9th December 2010 and up to 2016/17, where the relevant taxpayer made reasonable disclosure of their scheme usage to HMRC and HMRC did not open an investigation, should be out of scope of the Loan Charge.
This means that loans taken out between 9 December 2010 and 5 April 2016, will now be outside the scope of the loan charge if the taxpayer disclosed (or told) HMRC they were using a loan scheme on their tax return, and HMRC failed to take action.
Further details of what ‘disclosed’ means can be found in the new GOV.UK guidance, but generally it means providing enough information on your tax return that HMRC were able to identify and understand the nature of the loan arrangements.
Those who did not disclose anything (including only very small figures for employment income won’t count as a disclosure even they are odd/unusual looking) or who did not file a tax return at all, will still face the loan charge on loans taken out between 9 December 2010 and 5 April 2016.
Note that if the loan charge now does not apply to an outstanding loan, but HMRC have an open enquiry or assessment for that tax year, you may be able to enter the new settlement opportunity mentioned above (if you are not already in the November 2017 settlement process).
Recommendation: HMRC should refund settlements made when the relevant loans were entered into: a) prior to 9th December 2010; or b) between 9th December 2010 and the start of the 2016-17 tax year, where the scheme user made reasonable disclosure of their scheme usage in their tax return.
This means that certain people (those who made ‘voluntary restitution’ for any of the years above)
will be having their settlements recalculated to remove the relevant loans and to the extent they have paid anything to HMRC in respect of those loans, will be getting a refund. If you are currently making settlement repayments for loans that will be affected by the recalculation, then continue making repayments until advised by HMRC.
Note – HMRC need to wait until the legislation that carries through the changes to the loan charge is in place before being able to make refunds.
A number of things remain unclear at this stage – for example whether refunded years will still have ‘protection’ that a subsequent loan write off won't, of itself, trigger a tax charge under the loan charge legislation or whether HMRC will be paying repayment interest on any amounts refunded.
Recommendation: Taxpayers should be entitled to opt to spread their outstanding loan balances over three years, to mitigate the impact of taxpayers paying tax at a higher rate than they ordinarily would. This reduces the effect of stacking their outstanding loan balances into a single year, which artificially created an increased exposure to a higher rate of income tax.
This means that rather than have all your outstanding loans treated as income in the 2018/19 tax year, you can have a 1/3rd treated as income in 2018/19, a 1/3rd treated as income in 2019/20 and a 1/3rd treated as income in 2020/21.
This could benefit you if you are on a lower-income as it means it is more likely that your loan income will be taxed at 20% rather than higher rates. If you still have some personal allowance spare for those tax years, you might pay less than 20%. However, it may not be beneficial to use this option in all situations.
It is a non-revocable election, so you need to consider whether it is the right thing to do based on your individual circumstances. We revisit the examples of Anna, Brian and Cleaverson, below, to see how making an election could benefit you, but in reality this is such an important decision that you should take professional advice – help is available from TaxAid if you are on a low income and can’t afford an adviser.
Beware – payment of the loan charge is not the end of the story – it does not settle past liabilities. In particular, people need to understand that if the new spreading provisions mean that they pay little/no loan charge, HMRC may well pursue the tax via enquiries/assessments if they are able to/aren’t already. In such cases, people will essentially end up paying whichever is higher. (Conversely, we would hope, although cannot guarantee, that if people pay a reasonable amount under the loan charge, and there are no open enquiries/assessments, then HMRC will essentially draw a line in the sand.)
If you have past liabilities to settle and aren’t already in the ‘November 2017’ terms, but would like some certainty over your tax affairs, then our understanding is that you may be able to enter into the new settlement process (to be announced). You will still have to pay the loan charge, but any amount you have paid under the loan charge will be taken into consideration when calculating the settlement amount.
If you are already in the settlement process, you need to think VERY carefully before dropping out and taking a chance on paying a lower amount under the loan charge (if the spreading provisions would mean this) as HMRC may well try and find another way of recovering the tax, particularly if the amounts involved are significant.
Paying the loan charge
Recommendation: All individuals subject to the Loan Charge should only be asked to pay up to half their disposable income each year and a reasonable proportion of their liquid assets. No one should have to sell their primary residence or use their existing pension pot to pay the Loan Charge.
This means that taxpayers should only be asked to pay up to half their disposable income each year and a reasonable proportion of their liquid assets (for example, savings or investments), unless they have very high levels of disposable income.
Note that HMRC have recently published the income and expenditure form, in order to help ensure transparency and consistency in how disposable income and payment arrangements are calculated.
The government response repeats that HMRC will ‘not seek bankruptcy proceedings for individuals who have engaged with HMRC, completed an affordability assessment, and are solely unable to pay the Loan Charge’. HMRC also have existing powers which allow them to ‘remit’ a debt where the taxpayer has no ability to pay, until there is a significant change of circumstance.
Recommendation: HMRC should extend to individuals with income from £30,000 up to £50,000 in 2017-18 the same payment terms that were offered to such individuals who settled their tax affairs rather than pay the Loan Charge. Such individuals should be automatically able to pay the Loan Charge over up to five years without having to provide HMRC with further details of their asset ownership.
This means that where a taxpayer has no other sources of wealth and they earn less than £50,000, they should be automatically entitled to a minimum of a five year payment plan, and where they earn less than £30,000, a minimum of seven years, without needing to complete the HMRC income and expenditure form.
We understand that when measuring sources of wealth, HMRC will take into consideration disposable assets – but that this would not include a normal family car for example.
This does not mean that people who earn £50,000 or more cannot get a payment plan or that HMRC won’t go further than five or seven years – bespoke payment plans are available based on an income and expenditure assessment.
Although another of Sir Amyas’ recommendations is that there is a review of how interest should be applied where people owe HMRC money, this does not change anything for now. As such interest will apply from 30 September 2020, for any payment arrangements made. A long payment arrangement could therefore end up being very expensive.
Sir Amyas Morse also made other recommendations for change to the tax system, for example around HMRC’s future approach to tackling disguised remuneration avoidance schemes. This is very important because it seems that despite the loan charge, loan arrangements have not gone away.
The one recommendation that was not accepted was that individuals with income of less than £30,000 in 2017/18 should have any amount left outstanding after 10 years of paying the Loan Charge written off.
If, you need help understanding what these changes mean, or how to prepare your tax return, we strongly encourage you to engage with HMRC (tel 03000 599110 or email firstname.lastname@example.org) or TaxAid, if you are on a low income.
Anna was in a loan scheme during the tax years 2014/15 and 2015/16. She did not disclose these arrangements to HMRC, so all years remain in the scope of the loan charge. In 2014/15, she received a normal salary of £10,000 and an untaxed loan of £12,000. In 2015/16, she received a normal salary of £9,000 and an untaxed loan of £8,000.
In 2018/19, she has income of £19,000.
Under the loan charge (as originally set out), the £20,000 of untaxed loans will be treated as income in 2018/19. As Anna is a basic rate taxpayer in 2018/19 and the extra income does not push her into a higher rate bracket, this would mean tax of £4,000 (£20,000 multiplied by 20%).
Assuming that her situation doesn’t change over the next two years, she may elect to use the new spreading proposals. Anna would only need to include £6,666 of extra income in her 2018/19 tax return, resulting in an extra £1,333 of tax. She will need to do the same again for the following two years. Overall – she will have paid the same amount of tax as before, but because it is in more manageable chunks it makes it more likely that Anna will be able to pay without having to arrange a payment plan, which will save her interest.
Brian was in a loan scheme during the tax years 2014/15, 2015/16 and 2016/17. He did not disclose these arrangements to HMRC, so all years remain in the scope of the loan charge. In 2014/15, he received a normal salary of £10,000 and an untaxed loan of £18,000. In 2015/16, he received a normal salary of £10,500 and an untaxed loan of £18,000. In 2016/17, he received a normal salary of £11,000 and an untaxed loan of £18,000
In 2018/19, he has income of £24,000.
Under the loan charge (as originally set out), the £54,000 of untaxed loans will be treated as income in 2018/19. Brian already has income of £24,000, so only has some of his basic rate band available (£22,350) to use against the extra income. This would mean the remaining £31,650 of it will be taxed at 40%. As Brian has over £60,000 of income in this year, he also has to pay the High Income Child Benefit Charge (HIBCB). Total tax and HICBC due to HMRC = £18,919.
Under the new proposals, Brian would only need to include £18,000 of extra income in his 2018/19 tax return. Adding this to his existing income of £24,000, gives him a total income of £42,000. This means he does not get pushed into the higher tax bracket (which starts at £46,350) and he does not pay the child benefit charge. Assuming that his situation remains the same over the next two years, he will pay £3,600 extra tax in each of the years – a total of £10,800. This is £8,119 less than before.
Cleaverson was in a loan scheme during the tax years 2012/13, 2013/14, 2014/15, 2015/16, 2016/17 and 2017/18. He did not disclose these arrangements to HMRC, so all years remain in the scope of the loan charge. In all years, he received a normal salary of £5,000 and an untaxed loan of £20,000.
Cleaverson has now retired and in 2018/19, he has income of £6,000.
Under the loan charge (as originally set out), the £120,000 of untaxed loans will be treated as income in 2018/19. As Cleaverson’s total income in 2018/19 is £126,000, he is not entitled to any tax free personal allowance. Because of his £6,000 income, Cleaverson only has some of his basic rate band available (£28,500) to use against the extra loan charge income. This would mean the remaining £91,500 of it will be taxed at 40%. This gives a total tax amount on the loans of £42,300.
Under the new proposals, Cleaverson would have total income of £46,000 in 2018/19 (£6,000 existing income and £40,000 loan charge income). This means he does not get pushed into the higher tax bracket and he does not lose his tax-free personal allowance. Cleaverson will pay nothing on £6,500 of the loan charge income (due to his unused personal allowance) and £6,700 extra tax on the remainder of the loan charge income in 2018/19 and – if his situation does not change – around the same in the following two years. This is £20,100 in total, as opposed to £42,300 – so less than half of what it was before.
If Cleaverson wanted to pay this amount in instalments rather than in one go, then interest would be payable at 3.25% per annum on each of the £6,700 amounts. As Cleaverson is elderly and only has income of £500 a month from which to pay the debt (and has no other way of paying HMRC), this may be a situation where HMRC may agree to ‘remit’ some or all of the debt.
Final important point
In all of these examples, the spreading provisions look like they will benefit the taxpayers concerned. Please note however, that if any of these taxpayers had open enquiries/assessments for any of the years concerned, then they would still need to conclude these somehow, notwithstanding that they have now paid the loan charge (with double taxation relief available).
On the figures above, it would probably be the case that the credit for the amount paid under the loan charge would cover most of the underlying tax/interest/penalties found to be due in any settlement negotiations. But this might not always be the case. Take Anna, for example. If she was looking after her small children during 2018/19, 2019/20 and 2020/21, rather than working, and so had little or no other taxable income, she would potentially pay £0 tax by way of the loan charge. However, if HMRC had open enquiries/assessments for the years concerned, then it is likely that she will still need to pay HMRC around £4,000 as per the original settlement calculation example, to settle her tax affairs once and for all. That is why it is crucial to seek professional advice before making any decision.