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Employers’ newsletter - Loan scheme charge – April 2019

HMRC is taking action against certain loan arrangements (‘disguised remuneration’ schemes) that were designed to avoid tax, leaving many people with significant tax to pay.  HMRC states that it appreciates not everyone entered into these arrangements knowingly to avoid tax. Indeed, some agency workers may have had little choice but to participate in such schemes, if they wanted to work.

Most loan schemes sought to reward an individual in the form of an interest free, non-repayable loan that was not subject to income tax or National Insurance contributions (NICs). HMRC call this ‘disguised remuneration’. In 2011, the law was changed to try and stop people using such methods to avoid tax. However, there were various loopholes in the law, which meant that these types of schemes continued to be offered.

Additionally, loans made before the change in law remained in place untaxed unless or until the loan was varied in some way.

HMRC’s powers now permit it to impose a second taxing point for historical schemes, in the form of the April 2019 loan charge. This charge will basically affect anyone who used one of these loan schemes and who has not yet paid PAYE thereon.

The loan charge broadly means individuals will be treated as if they had received a notional amount of employment income on 5 April 2019 equal to the value of all the tax-free loans received since 6 April 1999 unless income tax and NICs have already been properly accounted for.

HMRC has wide information gathering powers and is aware of most loan activity already; but as part of the loan charge rules, you will be required to self-assess any tax in 2018/19 and provide as much information as you can about the loans you have received, to make sure they are all captured in the loan charge.

The amounts taken as tax-free loans over the years will be put together and taxed as employment income all in one year – 2018/19 – at your marginal tax rate.  As the amount is assessed as one lump sum amount, it will benefit from only one year’s worth of allowances and tax bands, despite the fact it may have arisen over a number of years.  While, in theory, the charge falls on the employer to pay, if the tax is uncollectable for any reason the likelihood is that the charge is going to be payable by the individual in line with the normal self-assessment tax return process. This means any income tax due will need to be paid by 31 January 2020.  Provided any tax is paid by this date, there will be no interest or penalties.

If you have been in a loan scheme in the past and have not yet regularised your tax affairs you have two options:

  • Pay the loan charge; or
  • Try and voluntarily settle any income tax that you owe with HMRC before the loan charge comes into play on 5 April 2019.
  • Repay the loan before 5 April 2019.

If you choose to settle you should be able to negotiate with HMRC as to what you owe and agree a payment plan to pay your tax liability over time. There is no defined minimum and maximum time periods for payment arrangements and, indeed, HMRC has recently said that people with income under £50,000 can automatically get a payment plan of up to 5 years as long as they are no longer involved in tax avoidance. If you need longer to pay, this will be considered based on your individual circumstances.

You will need to review your affairs for the years involved when the loans were made and for 2018/19 and calculate the applicable tax and NIC. This should enable you to see which of the options, settlement or waiting until 5 April, will give you the lower liability. However in making a decision you will also need to factor in your ability to pay the tax demanded.

If you are unclear about the possible impact for you or would like any assistance in calculating liabilities and liaising with HMRC, please do not hesitate to get in touch.

 

 

Date: 27th March, 2019
Author: David Hadley

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