HMRC Poised to Unleash £3.2bn Loan Charge on 5th April 2019: Are you affected?February 7, 2019
- HMRC poised to levy £3.2 billion in historic charges on loans dating back to 1999.
- HMRC’s loan charge applies to all outstanding third-party employment loans made since 6th April 1999.
- Original settlement deadline of 30th September 2018 has passed but HMRC is still receptive to negotiation.
On 5th April 2019, one of the most radical pieces of tax legislation will come into effect, introducing £3.2 billion in new taxes on historic loan payments. If the new charges affect you, it is essential you start making preparations right now to avoid insolvency.
In this article, I will look at the new legislation, who it affects and the options taxpayers have if they are caught by the new charge.
Why is HMRC introducing the loan charge?
For the past two decades, fancy accountants have sold tax avoidance schemes on an industrial scale, efficiently exploiting tax loopholes and fiscal grey areas to reduce their client’s tax liabilities. Film partnerships, Employee Benefit Trusts (EBTs), Employer-Financed Retirement
In recent years, HMRC has begun cracking down on these tax avoidance schemes using a raft of new powers,
- The General Anti-Abuse Rule (GAAR)
- Follower Notices
- Serial Tax Avoiders Regime (STAR)
One of the most significant new powers, the Accelerated Payment Notice (APN), was introduced in the Summer of 2014. APNs are essentially advanced charges for disputed tax issued by HMRC at the start of an investigation. The idea is that an individual pays the tax upfront, the court process then runs for several years and their money is returned if they win the case.
Much to HMRC’s disappointment, many individuals simply refused to pay their APN as there was no court ruling on whether they actually owed the sum. In practice, HMRC rarely proceeded with sequestration action over unpaid APNs over fears that a court would reject the sequestration (bankruptcy) and set a precedent that APNs are unenforceable.
While APNs did yield returns for HMRC, the sums were nowhere near its projections. With APNs failing to deliver, HMRC turned its attention elsewhere — disguised remuneration.
What is disguised remuneration?
In a disguised remuneration scheme, an individual ‘disguises’ their income as something non-taxable to significantly reduce their tax liabilities.
Below, is the disguised remuneration process as described in HMRC's loan charge fact sheet.
While there were many different disguised remuneration schemes on the market, the majority worked by issuing interest-free, non-repayable loans that were not subject to income tax or NIC.
Employee Benefit Trusts (EBTs) were the most popular disguised remuneration scheme. Here is how an EBT works in practice to decrease an individual’s tax liability.
- An individual (who for this example I’ll call Alan) offers his services through a personal service company.
- Alan’s client wants to pay him £3,000 for his work completed during the month.
- However, instead of paying Alan directly, the client gives the £3,000 to an EBT and the EBT issues a loan to Alan's company for £3,000.
- The EBT and Alan have an agreement that the loan will never be repaid or written off.
- Since Alan received the £3,000 as a loan, he doesn’t have to pay income tax or National Insurance contributions (NICs) on it.
All disguised remuneration schemes use intricate and highly complex financial arrangements that are specifically designed to reduce the amount of tax an individual pays. The loans issued have no commercial basis and are described as loans purely to avoid paying normal tax.
As I mentioned earlier, accountants and tax advisers started treating these schemes as commodities and sold them on an industrial scale. To me, there is a clear parallel between the packaging of subprime mortgages or the
In 2011, the government changed the law to block the use of disguised remuneration schemes. However, that didn’t recoup any of the historic losses. In 2017, the government introduced additional legislation that allowed HMRC to target the £3.2 billion lost through historic disguised remuneration schemes lost since 1999.
Through a new power called the loan charge, HMRC will be able to tax historic disguised income as if it were regular income. Since HMRC is looking back 20 years, this will create huge tax bills for individuals.
What is the loan charge?
The new loan charge power is set out in the Finance (No. 2) Act 2017, which actually came into effect in 2017. The new loan charge power was delayed until this year to give individuals time to investigate their finances and arrange a settlement with HMRC.
The new loan charge power essentially gives HMRC the power to look back 20 years and tax disguised remuneration loans that are still outstanding as if they were regular income.
In practice, the loan charge works by collecting all someone’s outstanding tax-free loans and taxing the sum as regular employment income at their marginal tax rate.
As I mentioned earlier, because HMRC is looking back 20 years, individuals are facing cripplingly large tax bills with little room for negotiation. While some bemoan the charge as a retrospective law change, others highlight the completely artificial and deceptive structure of the loans.
Whatever your view of the loan charge, everyone agrees that it is about to cause significant disruption in the financial landscape.
If you are concerned that you won’t be able to pay back your loan charge, I strongly recommend that you get in touch with our team today. Our initial advice is free and confidential.
What tax schemes attract the new loan charge?
As I mentioned above, the loan charge applies to all disguised remuneration schemes since 1999. While there were dozens of schemes available, the majority of affected people signed up with just three:
- Employee Benefit Trusts (EBT)
- Employer Financed Retirement Benefit Schemes (EFRBS)
- Contractor Loan Schemes
Since loan schemes were incredibly common throughout the 1990s and early-2000s, accountants begun packaging them with original and inventive names to make them more appealing. If you engaged in a scheme that used interest-free, non-repayable loans, it’s important you check if you are affected even if it isn’t explicitly called an EBT or EFRBS.
HMRC estimates that the loan charge will affect between 40,000–50,000 individuals, although several industry experts predict the figure may be as high as 60,000. It’s also worth highlighting that the loan charge risks targeting directors with legitimate (albeit outstanding) loans from their business.
Is corporate insolvency an option?
Since many individuals received loans through a limited personal service company, many believe that corporate insolvency can kill off loan charge liability. Unfortunately, this is not the case.
“HMRC will issue a regulation 80 determination in respect of the unpaid tax included in their Real Time Information (RTI) return. Once this determination has been unpaid for 30 days HMRC will use regulation 81 to direct the liability on to the employee.”— 'Tackling disguised remuneration' by HMRC
In practice what this means is that HMRC will start by pursuing the company for payment. Where the company cannot pay, it will shift the tax liability onto the individual beneficiary of a disguised remuneration scheme and pursue them personally.
If the company is already dissolved, HMRC will pursue the individual immediately.
Shouldn’t HMRC chase the umbrella company?
While some individuals operated through a personal service company, others worked under an umbrella company. These companies were often pitched as a safe arrangement where the umbrella company shoulders most of the exposure.
Unfortunately, like with personal service companies, reality is more complicated.
The initial liability does indeed fall on the umbrella company but there are many ways for it to shift onto the individual.
- If the employer is based overseas and doesn’t have a UK tax presence, it is outside the PAYE net and it is down to the individual to pay their tax liability via self-assessment.
- If the employer is dissolved, liability falls to the individual to report income and pay any tax liability.
- If the employer still exists but is unable to pay, liability falls to the individual and HMRC will pursue them personally.
In practice, these three exceptions will cover the vast majority of cases and result in the liability moving from company to individual. To make matters worse, if HMRC does actually locate an operational company and manages to collect the unpaid tax from it, the company will usually pass the bill on to the employee.
What should I do if I’m worried about paying the loan charge?
If you have been involved with any tax avoidance schemes since 1999, it’s essential that you check if the loan charge applies to you. As I mentioned before, many schemes were dressed up in fancy marketing to make them more attractive so they might not immediately look like a disguised remuneration scheme. If you are in doubt, I recommend asking an
HMRC is likely to be very aggressive in enforcing the new loan charge. You cannot simply ignore HMRC’s demands like you would an APN and assume it will eventually go away. If you ignore the loan charge, HMRC will bankrupt you.
Since the legislation has been in place for some time, you may have already heard from HMRC. Whether or not HMRC has approached you, it is always a good idea to appoint a suitably qualified and experienced accountant to analyse your finances and recommend your next steps.
If you discover the loan charge does apply to you, you have two options available.
#1 Negotiate a settlement with HMRC
HMRC has set two deadlines to register your interest to negotiate a settlement. The first was 31st May 2018 and the second was 30th September 2018. Do not worry that both deadlines are passed as HMRC is reportedly still receptive to individuals coming forward to discuss a settlement.
This gives you the chance to negotiate what you actually owe and how you will actually repay it. The good news is there is no maximum time period for repayment and people with an income under £50,000 per year can automatically get a five-year payment plan.
As with all HMRC negotiations, it helps to have someone on your side who understands how to deal with them. If you aren’t confident in dealing with HMRC, I strongly recommend seeking advice from a suitably qualified and experienced professional.
#2 Pay the loan charge
If you have any loans outstanding on the 5th April 2019, HMRC will apply the loan charge and then you have until 31st January 2020 to make the payment.
Depending on your circumstances, the size of your loan charge will vary immensely. While some individuals may be in a position to pay their loan charge, many simply won’t have the money.
Unfortunately, according to HMRC, 24,500 out of a total 50,000 suspected individuals are yet to come forward to negotiate a repayment schedule.
If you are worried about the imminent loan charge but you haven’t yet received any communication from HMRC, I strongly recommend you take independent tax advice or speak to your accountant. (As long as your accountant is not the person or organisation that sold you the scheme in the first place.) If you do not already have an accountant, I recommend you speak to SD Business Management.
If you cannot pay HMRC’s tax demands, it’s incredibly important you speak to a suitably qualified and experienced professional as soon as possible. At 180 Advisory Solutions, we have extensive experience dealing with personal and corporate debt and are prepared to support you through your negotiations with HMRC.
To see how we helped a chartered accountancy firm survive a seven-figure demand from HMRC, click here to read our case study.
If you would rather speak to one of our team members immediately, click here to get in contact today. Our initial advice is free, confidential and no-obligation.