Friday, August 21, 2020
The UK tax authority has published final guidance on the Loan Charge regime, following the enactment of amendments in the UK Finance Bill 2019-21.
The Loan Charge applies to individuals who have directly entered into disguised remuneration (DR) schemes. Specifically, it is intended to bring within the charge to tax tax-avoidance arrangements that enabled users to avoid income tax and national insurance contributions by taking salaries in the form of a loan. In reality, this loan would never be paid back.
The Loan Charge came into effect on April 5, 2019, and was to apply to all loans made since April 6, 1999, if they were still outstanding on April 5, 2019, and the recipient had not settled the tax due.
Amid concerns from lobby groups and lawmakers as to whether the charge was lawful, the Government commissioned an independent review of the loan charge in September 2019. The Government responded to the findings of the review with the announcement of a package of changes on December 20, 2019.
It decided that the Loan Charge will apply only to outstanding loans made on, or after, December 9, 2010. In addition, the Government said the Loan Charge will not apply to outstanding loans made in any tax years before April 6, 2016, where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, by opening an enquiry).
New Loan Charge Guidance
On August 13, 2020, HMRC released an update to its policy paper "HMRC issue briefing: settling disguised remuneration scheme use and/or paying the loan charge". It also released guidance for tax agents in "Disguised remuneration settlement terms 2020", discussed in detail below.
According to the policy paper, depending on a taxpayer's circumstances, some taxpayers may be required to act before September 30, 2020.
HMRC noted most people who have used DR schemes will fall into one of five main groups, depending on their circumstances:
The policy paper sets out how HMRC will engage with taxpayers to secure a settlement. It says taxpayers who provided the necessary information about their scheme use by April 5, 2019, and who work with HMRC to conclude a settlement by September 30, 2020, will be able to settle under terms published in 2017 and keep clear of the Loan Charge. These terms will be withdrawn after September 30, 2020, the guidance says.
Those unable to pay the Loan Charge, even after spreading it out over three years, may contact HMRC to negotiate an affordable payment plan. Those with an income of less than GBP50,000 that have no disposable assets may access a five- or seven-year payment plan without having to provide detailed financial information.
HMRC concluded: "Customers who do not wish to settle the tax due in respect of their DR schemes under our published terms have the option of taking their case before the tribunals and courts. HMRC's view is that DR schemes are a clear example of tax avoidance that do not achieve the intended tax advantage, which we are duty-bound to pursue."
"As the litigation process could take between one and 10 years, customers who adopt this course of action risk paying additional legal costs and interest."
"We will continue to progress and settle open enquiries into DR under our existing powers, including schemes that are now out of scope of the loan charge. This approach was endorsed by the independent review."
Disguised Remuneration Settlement Terms 2020
According to HMRC, the newly released 2020 settlement terms include the main features:
According to HMRC, the main differences with the 2017 terms are: