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20 December 2019 saw publication of the eagerly awaited report by Sir Amyas Morse on the 2019 Loan Charge provisions following his independent review, together with the Government's response. This update looks at the main changes to the current position and the impact on clients who have already settled their 'disguised remuneration' loan arrangements with HMRC and those who have yet to do so.
What are the main changes following the review?
The report contains welcome changes to what many saw as an egregious piece of legislation with an unprecedented look back period. The Government has accepted all but one of the report's recommendations.
Prior to the review, the Loan Charge provisions essentially treated any outstanding loans from disguised remuneration arrangements made from 1999 as taxable in the 2019/20 tax year. The main changes to this position are:
- The Loan Charge provisions will now only apply to loans made after 6 December 2010 (when the 'Disguised remuneration' provisions at Part 7A ITEPA 2003 came into effect) rather than from April 1999;
- For loans made after 6 December 2010 and before 6 April 2016, the Loan Charge will only apply if the taxpayer failed to provide a 'reasonable disclosure' to HMRC about the loan scheme and if HMRC has protected (by way of raising an enquiry or issuing an assessment/determination) for the relevant tax year;
- Loans made from April 2016 to April 2019, whether protected or not, will continue to fall within the scope of the Loan Charge.
For those of us who have been advising clients in this area and assisting them to settle their historic arrangements with HMRC, these changes are welcome and should have a positive impact. Many are likely to see their settlements or potential final liability position reduced as a result of these measures.
What does this mean for clients who have already settled with HMRC?
Clients who have already settled their arrangements with HMRC will need to revisit the settlement computations as a refund may well be due. Essentially, these changes mean that for clients who have paid PAYE/NIC on loans prior to 6 December 2010, and only paid the additional tax on a 'voluntary restitution' basis (i.e. for years where HMRC have not raised an enquiry/issued a PAYE determination but payment has still been made in order to avoid the loan charge from applying) are likely to be due a refund. For companies/employers, this could, however, impact the final settlement amount as any corporate tax deductions on the amounts included within the original settlement may have to be recalculated.
In addition, clients should also look closely at the position of loans made post 2010 to April 2016, to establish whether sufficient disclosure of the arrangements has been made on the tax returns (and any accompanying information) to HMRC. If sufficient disclosure has been made, and HMRC have not protected the relevant tax year, the relevant PAYE/NIC liabilities may also now be excluded. It's interesting to note that while Sir Amyas's report refers to 'reasonable disclosure' in this context, HMRCs recently updated guidance talks about 'fully disclosed'. Further guidance is expected in the early January, but we suspect that the conditions will have to be consistent with the ‘discovery’ rules, particularly for periods going back more than 4 tax years.
We also suspect that this will mean entering into a new settlement agreement with HMRC to reflect the revised figures and potentially revisiting agreed payment plans.
Unfortunately, clients will have to wait until Summer for any repayments to be made by HMRC. The department has made clear that no repayments will be made until the new legislation is enacted. Royal Assent on Finance Bills is usually provided in the Summer, thus this delay.
It will be interesting to see how HMRC resources their teams to ensure that for those who have already settled, their position can be reviewed, discussed and agreed and a repayment made by Summer 2020. Given the delays experienced by many taxpayers in settling their affairs, our advice would be for clients to start the process of reengaging with HMRC as soon as possible.
It’s important to note that for situations where HMRC has protected a particular tax year (by raising an enquiry or issuing a PAYE determination), they will continue to seek the income tax even if the loan was made before December 2010.
What does this mean for clients who have not settled with HMRC and intend to pay the Loan Charge?
For those who will be paying the loan charge, the review contains a number of changes:
- As noted above, the Loan charge will not apply to any loans made before 6 December 2010 where HMRC has not protected the assessing/enquiry position;
- The deadline for reporting the Loan Charge to HMRC has been extended to 30 September 2020. Assuming this is done, HMRC has agreed not to charge any interest or penalties;
- The Loan Charge can be spread over three tax years rather than one. Prior to these changes the value of all outstanding loans were required to be amalgamated and taxed in 2019/20. For many clients this meant them having to pay tax at the additional rate (45%). The changes mean that a taxpayer can now choose to spread the loan amounts over the three years from 2018/19 to 2020/21 which may help to manage the effective tax rate.
- Anyone with income of between £30k and £50k in 2017/18 tax year will be allowed to pay the Loan Charge over a 5 year period, without having to supply additional information to HMRC.
- No one should have to agree to pay to HMRC more than 50% of their disposable income when agreeing payment terms. Nor should anyone be forced to sell their primary home or use an existing pension pot to fund the Loan Charge payments.
Those who have been holding off from reviewing their position or engaging with HMRC, should now consider doing so. It seems unlikely, given the nature and scope of the independent review and the Government’s acceptance of virtually all of the report’s recommendations, that we will see any further changes to the legislation. Settling with HMRC is still a possibility and should be considered along with the other relevant options.
How can Pannu Tax help?
Advising effectively on these changes requires a detailed knowledge and experience of HMRCs settlement terms as well as the taxman's ability to assess historic tax liabilities, transfer those liabilities from employers to individuals. At Pannu Tax we have helped many dozens of clients to understand their options and make informed decisions on the way forward. Where settlement with HMRC is the best option, we have assisted them to resolve their outstanding tax arrangements.
If you would like more information on these issues, please do not hesitate to get in touch.