Loan charge: where are we now?
HMRC have sent out 'notices to file' to people who they believe may have to report and pay the loan charge by the forthcoming 30 September 2020 deadline.
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With the coronavirus pandemic at the forefront of our minds, it is easy to forget that the loan charge remains an issue for many people. Here we explain the notices to file, remind you about the 30 September 2020 deadline and discuss how the coronavirus situation might impact your overall position.
Here is a quick recap of how we have got to where we are today. (If you are starting from scratch in terms of what the loan charge is and what you need to do, we suggest you work through the articles linked to in the Further reading section.)
Originally (in the absence of any action taken to ‘settle’ beforehand), the loan charge was going to treat an amount equal to the value of all outstanding ‘disguised remuneration’ loans made since 6 April 1999 loans, as income arising on 5 April 2019.
Following concerns raised about the impact of disguised remuneration loan charge, the government commissioned an independent review of it. The review reported to the government on 13 December 2019.
As a result of this review, the loan charge now applies to loans made on or after 9 December 2010, and outstanding on 5 April 2019. There is an exception to this, however, for loans made on or after 9 December 2010 and before 6 April 2016, if the avoidance scheme use was fully disclosed to HMRC and, as at 5 April 2019, HMRC had not taken action to protect their assessing position – for example, by opening an enquiry or issuing a tax assessment.
⚠️ WARNING: Remember that although the loan charge may not now apply to certain tax years – if there is an open enquiry or assessment relating to your disguised remuneration scheme use for the years that are outside the loan charge, they still need to be dealt with.
Another major outcome of the review is that for the loans that remain within the loan charge, there is the option to make an irrevocable election to spread the remaining loan income over three years. This means that rather than having 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 in 2019/20 and a 1/3rd in 2020/21. In many cases this will reduce the tax charge for 2018/19.
⚠️ WARNING: If you have an open enquiry or assessment for the loan year in question you may not really benefit from this change, even if it makes the loan charge less expensive for you than settling, as the underlying enquiries/assessments will still need to be dealt with. Although there should ultimately be no double taxation, if the amount ultimately agreed or assessed is higher than the amount paid under the loan charge, this can mean that you will end up having to pay the difference.
What is the 30 September deadline?
People affected by the loan charge have an important deadline coming up – 30 September 2020.
This is the date by which people in the 'November 2017 terms' settlement process must settle. HMRC should have been in contact with you by now if you are in this group. If they haven’t or if you haven’t engaged with HMRC in response to their recent letters, please get in touch with them as soon as possible on 03000 534226.
Please be aware that although 30 September 2020 may seem a long way off, there are several steps involved in the settlement process before settlement can be concluded. If you want to settle, it is therefore important you give HMRC the information they need by the dates they ask for it.
Unfortunately, if you don’t reply by the dates given by HMRC, they are unlikely to be able to settle with you under the November 17 terms and you will have to report and pay the loan charge (although, assuming the reason you were settling in the first place was because you had an open enquiry or assessment, these will still need to be dealt with – outside of the November 17 terms).
Even if you think you have discussed everything there is to discuss with HMRC about your settlement, if they are writing to you, it is important to reply to them because they may need you to confirm certain things again following the outcome of the review.
For those outside of the settlement process or who find it is too late to settle (although we understand HMRC plan on working down to the wire to finalise settlements), the 30 September 2020 is the date by which you must:
- report the loan amounts if you have not done so already via the on-line loan charge reporting form. A paper version can be obtained by calling 03000 599110
- decide whether to elect to spread the loan amounts over 3 years (also done via the loan charge reporting form)
- file your 2018/19 tax return and report the loan income in the relevant pages and boxes. You may need to include the Additional Information pages
- pay the loan charge and any other tax due (or agree a payment plan).
30 September deadline – Admin matters
Loan charge reporting form: The loan charge reporting form is accessed via GOV.UK. If you want to spread your outstanding loan balance evenly over 3 tax years, this form will enable you to do this. If you do not want to spread your loan balance, you must still complete the form if you haven’t already reported your loan amounts. Those who have previously completed the loan charge reporting form, do not need to amend it even though their loan charge liability may have now changed, unless they want to make the spreading election.
Notice to file: HMRC have recently issued 'notices to file' 2018/19 tax returns to all the people they believe may need to may have to report and pay the loan charge by 30 September 2020 who have not already filed or notified HMRC of their need to file a 2018/19 tax return (strictly this notification should have been given to HMRC by the 5 October 2019, however HMRC have advised that no customers would be subject to failure to notify penalties for 2018/19 if they were only required to notify due to the loan charge).
These will be standard letters and they will not include any mention of the loan charge. Although they may arrive at a difficult time because of the coronavirus pandemic, legally HMRC are required to give 3 months' notice for people to complete and submit their tax return.
Along with the 2018/19 notices, 2019/20 notices to file were also issued because the end of the 2019/20 tax year has now passed.
If you have received these notices to file but you hope to settle with HMRC before 30 September 2020 and have no other reason to complete a 2018/19 or 2019/20 tax return, then you should discuss your positon with HMRC/ask them to withdraw the notices to file, which they may do once you have settled.
If you received a 2019/20 notice to file, but do not plan on making the irrevocable spreading election and have no other reason to complete a 2019/20 tax return, then again, you can ask HMRC to withdraw the notice to file. In these circumstances, you should also make sure you claim to reduce any payments on account that are generated from the inclusion of the all the loan income in your 2018/19 tax return, as we explained in our earlier article.
If you haven’t received a notice to file, but think you were in a loan scheme, you should contact HMRC on 03000 599110.
Will there be a change to the deadline because of the coronavirus?
HMRC have previously stated in their guidance (and not specifically in contemplation of the coronavirus) that they will consider waiving late filing and payment penalties on a case-by-case basis for any 2018/19 tax returns filed after 30 September 2020.
We don’t expect there to be any relaxations in respect of the 30 September deadline, beyond this. HMRC say that while they recognise that it is a difficult time for many, in terms of being able to access physical records and documents kept elsewhere during lockdown, most people should still have the time they need to meet 30 September 2020 deadline, particularly now that lockdown is gradually easing.
Having said that, it is worth noting that the government have recently introduced a rule that allows HMRC to flex the 30 September deadline to make an election to spread the loan charge, and to continue to dis-apply interest for certain groups. We understand that HMRC envisage applying this flexibility in limited circumstances rather than in all cases affected by the loan charge, if at all.
My income has dropped because of the coronavirus. How does this affect my loan charge position?
If you have little or no income in the 2020/21 tax year due to the coronavirus, this means you could pay less by way of the loan charge, if you make the irrevocable election to spread your loan income over three years.
Even before the coronavirus pandemic, the spreading provisions could save you money, especially if your income has reduced as this may help you avoid paying higher rates of tax, triggering the High Income Child Benefit Charge, losing your personal allowance etc. (In order to get a better understanding of how the spreading provisions may impact you, see the examples that we put together at the end of our recent LITRG website article Loan charge changes: what they mean... and what they don’t.)
If your income has been adversely affected by the coronavirus in 2020/21, you could now save even more money – if for example, your loan income, when added to any other income you have, falls within the £12,500 personal allowance.
⚠️ IMPORTANT: We would hope (and have asked HMRC to confirm – see below) that where people decide they are better off facing the loan charge and/or electing to use the spreading provisions, that HMRC will observe the spirit of the Morse recommendations and won't try and use their enquiry or discovery powers simply to try to pursue any savings made by taxpayers.
Any payment arrangements will be based on your current financial position - as at the time you apply.
Therefore having a significantly reduced amount of income in 2020/21 due to the coronavirus, could be relevant to any payment arrangements you make with HMRC – for example, it could mean that you are now entitled to a 'no questions asked' type payment plan.
Where someone 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. To discuss payment arrangements with HMRC, call the loan charge helpline on 03000 599110.
Bespoke payment plans are available based on an income and expenditure assessment (the form HMRC use is now available on GOV.UK) – people 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 if your financial position markedly improves in the future, HMRC may seek to renegotiate the payment arrangement with you to try and collect what is owed more quickly.
Interest (currently 2.60% per annum – recently reduced from 3.25%) will be payable on any payment arrangements made. This drop in interest rates could significantly benefit you if you think you are going to need a long time to pay what you owe, as usually, the longer the payment plan you agree, the more interest you will pay in the long run.
If there is a change in the interest rate, strictly, it will apply to payment arrangements. In practice, however, HMRC will not seek to rearrange things but will consider whether to seek further interest due at completion of the payment arrangement. HMRC have informed us that where the amount is marginal, they will not pursue this additional interest.
I'm confused and don't know what to do for the best!
If you don't know what to do for the best, for example whether to continue to settle or whether to elect to spread the loan charge and this is stopping you from taking action, we would urge you to seek professional advice (including from TaxAid if you are on a low income) as soon as possible so as to ensure that you can meet the 30 September deadline.
Here are some things to think about in the meantime:
If you don't know whether to continue to settle or not
Many low-income workers will be better off by settling, particularly if the loan income arose over multiple tax years and there are other loose ends (such as potential IHT liabilities, outstanding historic tax returns and late filing penalties etc.) as these should all be dealt with in the settlement process. Settling your tax affairs once and for all can also bring an element of closure.
However in some cases, you might be better off paying the loan charge. This may be the case if:
- There is no open enquiry/assessment for the year in question
- You were only in a loan scheme for a short period of time
- Your income now is less than it was in the year you received the loan(s)
- Significant historic interest or penalties will be due under settlement
- You face additional rate tax at 50% under settlement, rather than the 45% it is now.
It is not possible to give definitive advice as it depends on your own personal circumstances. You need to weigh things up very carefully if you are thinking about withdrawing from the settlement process.
If you don't know whether to make the spreading election or not
Some considerations, in addition to your financial circumstances in 2020/21 as a result of the coronavirus, are:
- If you have enough capacity to absorb the extra loan income in 2018/19 without triggering any extra charges, then in the interests of certainty and finality, you may wish to deal with everything in 2018/19.
- If you make the spreading election, you may have to pay your taxes via payments on account but there will still be a cash flow benefit (the earliest the tax becomes due on one third of the loan amounts is 30 September 2020, the next tranche is then 31 January 2021/31 July 2021 and so on).
- If you know that you are not ever going to be able to pay what you owe under the loan charge, and if HMRC won’t 'remit' the debt, you just may want to file your 2018/19 tax return to 'crystallise' the entire debt and make a fresh start. You can read more about dealing with tax debt issues, including where to seek advice on your options on TaxAid’s website.
- If you have a terminal illness you might benefit from making the spreading election as it is our understanding that under general principles HMRC cannot collect future liabilities from someone's estate, although we gather that this is being looked at by HMRC.
- There is the possibility, if you need to arrange payment arrangements for future tranches of loan charge tax, that interest rates might rise.
The elephant in the room
There is one huge question underlying both these dilemmas – the fact that people do not currently feel that they can 'safely' make a decision one way or the other, for fear of HMRC trying to find another way of securing any savings made by people choosing the loan charge and/or by making a spreading election. (Note, that until the changes were announced, in most cases, the amount paid via the loan charge would more than credit any underlying disputed amount, but now this is not so clear cut.)
We have urged HMRC to clarify their position here (that is, whether they plan to issue further enquiries/assessments into the use of disguised remuneration arrangements caught by the loan charge solely to pursue any savings made or whether they will now draw a line in the sand) as we think that this will afford people the clarity and certainty they need to make a decision and will encourage them to move towards the 30 September 2020 deadline. Please check back to our website for any updates.
We recommend that you read this article in conjunction with the other main articles LITRG have put out on this topic: