Following the Independent Loan Charge Review published in December, there seems to be a vast amount of excitement that exposure to historic tax liabilities may be reduced or even wiped out. However, whilst the key changes which have not been drafted into legislation yet appear to offer some relief, it’s a little bit more complicated.
HMRC have set out the key changes to the loan charge, which are:
- The charge will only apply to outstanding loans made on, or after, 9 December 2010. You might therefore think you have immediately escaped a liability to tax if the loan was made before this date. Below we consider whether someone can escape the charge to tax when the loan was made before 9 December 2010.
- The charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme use was fully disclosed to HMRC and HMRC did not “take action”. Taking action is loosely described as opening an enquiry although we consider what might be regarded as “fully disclosed” below.
- It is intended that an election may be made to spread the amount of outstanding loan balance evenly across 3 tax years i.e. 2018 to 2019, 2019 to 2020 and 2020 to 2021. The intended effect is for the outstanding loan balance to avoid being subject to higher rates of tax. Obviously, this is dependent on the size of the loan balance.
HMRC will refund payments made under ‘voluntary restitution’ in order to prevent the loan charge arising and being included in a settlement agreement reached since March 2016. Refunds cannot be processed until after legislation is introduced. This is intended to apply for any tax years where:
- Loans were made before 9 December 2010
- Loans were made before 6 April 2016 and the avoidance scheme use was fully disclosed to HMRC but they did not take action.
There are also additional flexible settlement proposals:
- If you do not have disposable assets and earn less than £50,000, HMRC will agree ‘Time to Pay’ arrangements for a minimum of 5 years. If you earn less than £30,000, they will agree a minimum of 7 years. If you need longer to pay, you will need to provide HMRC with detailed financial information. There is no maximum time limit for a ‘Time to Pay’ arrangement.
- In line with existing practice, if you need ‘Time to Pay’, you will pay no more than 50% of your disposable income, unless you have a very high level of disposable income.
Loans Made Before 9 December 2010
The loan charge will not apply to loans made before 9 December 2010 although that does not prevent a liability to tax. Prevailing case law still regards contributions to third parties for the benefit of employees to be emoluments subject to tax. The liability is under PAYE regulations collected by the employer and therefore until recently, recipients of loans had some comfort that the tax liability (if any) lay with their employer. However, the recent First Tier Tribunal case TC07292: Stephen Hoey concluded otherwise. In that case, it was affirmed the liability was that of the employee and whilst PAYE regulations acted to collect the tax, they did not change the liability from employee to employer. The case needs careful reading to consider whether applicable in specific circumstances.
In addition, the case confirmed a risk we have previously considered being the application of anti-avoidance legislation applying to the transfer of assets abroad. The conclusion was:
“I therefore regard the basic structure, of Contractors being employed by an umbrella company which then provides their services to the End Users, as being a perfectly reasonable commercial transaction. However, I regard the insertion of additional transactions, being the setting up of an umbrella company offshore, which makes payments to a trust, which then makes interest free loans to the Contractors, with the expectation that those loans are never repaid, as constituting tax avoidance.”
However, the income to which the employee had power to enjoy was nil because the amounts paid to the employee benefit trust (EBT) were not regarded as the income of the employer. When an EBT has invested (loans or otherwise) giving rise to income, that income could be income which the employee has the power to enjoy and therefore subject to income tax.
Regardless of the loan charge being removed for certain loans, HMRC’s ability to seek tax whether from an employer or the employee will ultimately depend on whether they have open enquiries, raised assessments or can make a discovery.
Loan Charge: Fully Disclosed
The loan charge will also not apply to those made before 6 April 2016 and where the avoidance scheme was fully disclosed and HMRC did not act. It is assumed that the reference to an ‘avoidance scheme’ would be to one under the disclosure of tax avoidance schemes. However, it is not actually stipulated and could also include the situation where a taxpayer has made a disclosure but HMRC has not responded to the disclosure. Given HMRC were exceptionally resource-strained following the closure of the EBT settlement opportunity and contractor loan settlement opportunity, there are a lot of disclosures that HMRC did not follow up on.
When the avoidance scheme (or circumstances) have been fully disclosed, the loan charge will not apply although HMRC’s ability to seek tax will depend on whether they have open enquiries or have raised assessments.
HMRC clearly state that:
“Paying the loan charge does not resolve the underlying tax dispute with HMRC for the years in which loans were made. Tax years that are subject to an open enquiry or assessment will still need to be resolved, either by way of settlement with HMRC or through litigation.”