The highly anticipated loan charge review has been underwhelming for most, despite many living in hope, I think it reflects the general expectation from within the tax profession.
We have previously set out a thorough analysis of the report and response [Loan Charge Review – Summary of Revised Payment Terms (etc)], [Loan Charge Review vs. Government Response – ‘Cut Out & Keep’ Comparison] and [Loan Charge Independent Review – Was it all worth it?].
Following the response, HMRC has again updated its guidance this week, alongside publishing draft legislation. We consider this below.
Self-Assessment Tax Return Filing Dates
Where taxpayers have outstanding loans that fall within the loan charge and are obliged to file a self-assessment, HMRC Guidance states,
Customers who have not filed their tax return, or agreed a settlement with HMRC, should submit a Self-Assessment tax return for the 2018 to 2019 tax year. You can either submit by 31 January 2020, giving your best estimate of the tax due, or file by 30 September 2020. HMRC will waive penalties for late filing, late payment and inaccuracies in respect of the loan charge entries in these returns. Late payment interest will not be payable for the period 1 February 2020 to 30 September 2020, as long as a return is filed, and tax paid or an arrangement made with HMRC to do so, by 30 September 2020.
In summary, taxpayers have two options:
- Firstly, submit your tax return by 31 January 2020 as normal – here one would need to give the best estimate of the tax due under the loan charge; or
- Secondly, file by 30 September 2020.
A period of grace is being offered to taxpayers to allow further time to settle or consider whether to suffer the loan charge.
Originally, under the second option, there was some confusion as to whether taxpayers were required to file the return excluding all LC matters by the normal deadline, followed up with an amendment to that return by 30 September including the loan charge information.
However, this has now been clarified by the publication of the recent guidance. Taxpayers can wait until 30 September to file all income and gains for 2018/19 if one is affected by the loan charge.
Further to this, HMRC will waive any penalties for late filing and late payment interest for the period 1 February 2020 to 30 September 2020, as long as a return is filed, and tax paid or arrangement agreed by 30 September 2020.
The guidance goes on to state:
If you receive automatic messages and penalties from the Self-Assessment system you should phone the loan charge helpline on 03000 599110 so HMRC can remove the penalties from the Self-Assessment system
As such, if the thought of HMRC helpline hell trying to have penalties cancelled fills you with terror, you might STILL file the return by the normal due date, leaving off the LC details and follow up with an amendment to add the LC info in the future.
HMRC has confirmed in its guidance that the only way of closing underlying enquiries and assessments dating back to earlier years is to settle with HMRC.
However, having looked at a recent settlement agreement, there was no express clause included that stated that any earlier open years related to the settlement will be closed as a result of that settlement.
HMRC will likely send out closure notices at a later point as a means of formally closing earlier years.
However, taxpayers are subject to HMRC being prudent in ensuring all earlier enquiries and assessments are closed.
Within the changes, the Government has proposed that any post-2010 outstanding loans that were fully disclosed to HMRC and where HMRC correspondingly failed to take any action, such as opening an enquiry, these will now fall outside of the loan charge. Loans that were not fully disclosed will still be subject to the loan charge.
But, I hear you say, what is reasonable disclosure?
Well, reasonable disclosure is perhaps a much higher threshold to scramble over than one might think.
Particularly, it is a requirement for the disclosure to both:
- Identify the scheme under which the loans were made; and,
- It contains sufficient information for it to be apparent that a reasonable case could be made that for the relevant year the taxpayer is chargeable to income tax on an amount that was referable to the loan or quasi-loan.
So, cards would very much have had to be on the table.
In our view, for what it’s worth, this requirement will be difficult to discharge in the absence of a DOTAS number on the tax return or a particularly detailed (and therefore unlikely) white space disclosure.
In reality, it is likely that very few taxpayers will be able to benefit from this concession because HMRC have been proactive in opening enquiries and assessments in relation to DR schemes, particularly where loans have been disclosed.
Within the changes, the Government has also proposed that any pre-2010 outstanding loans will now fall outside of the loan charge.
Many people who fall into this category will be relieved by this concession. However, anyone falling into this category should be cautious for two reasons.
Within the Government response, HMRC has expressly stated that,
“The Government will also invest in a new HMRC team to conclude enquiries and bring in the tax due from people who in the past have used DR schemes, and other forms of tax avoidance. The team will engage positively with those who wish to settle their affairs and will have the resources and skills to pursue cases to tribunal and through the courts where that is necessary to collect what is due. This will ensure people who entered into DR avoidance schemes before 9 December 2010 still pay the tax due […]”
From this, it is therefore assumed that those who have open enquires or assessments from pre-9 December 2010, HMRC will likely seek to recover amounts owed through litigation.
In reality, this offers no concession at all to those who fall within this category, other than potentially deferring the inevitable payment of income tax and corresponding late payment interest. It is likely that the Government will publish its approach on this in due course.
HMRC has made no express statement that it will seek to open assessments for those who entered into DR avoidance schemes prior to 9 December 2010, however where HMRC can show that a loss was deliberately brought about, HMRC may legitimately do so for up to 20-years prior to the date of opening the assessment.
Whether HMRC will attempt to raise discovery assessments for pre-9 December 2010 closed years and whether HMRC would be successful in doing so, would likely be an issue that is resolved in the courts. For many, this will certainly be very difficult to satisfy – however it is worth identifying this for completeness.
Notably, this would certainly detract from the concession that the Government sought to offer in removing the pre-9 December 2010 from the loan charge.
Requirement to Correct (RTC)
Requirement to correct (‘RTC’) was introduced to counter historic offshore non-compliance.
Where taxpayers did not notify and correct their undeclared offshore tax liabilities before 30 September 2018, HMRC will apply a penalty of up to 200% of the tax liability that should have been disclosed to HMRC, albeit this can be reduced by a maximum of 100%.
Many of the loan schemes worked via an offshore trust and therefore, in a strict sense this could potentially bring some taxpayers within the RTC regime. However, from a policy perspective it would be incredibly unfair for HMRC to pursue taxpayers under these rules.
3 Year Spread of the Loan Charge
One of the many criticisms of the loan charge was that it added up all the loans taken over, perhaps, many years and treated it as one, big dollop of income in 2018/19.
As a result, this is likely to leave most of those affected (though not all) with a higher tax charge.
As recommended by the review, HMRC are now offering an opportunity for those suffering the loan charge to split their loans into tranches of three and record this as income over three consecutive years, namely:
- 2019/20; and,
Overall, the aim is to allow taxpayers to utilise lower rates of tax, where applicable, as opposed to being taxable on one large amount by 31 January 2020.
The legislation reads as follows:
1A (1) This paragraph applies where—
(a) a person (“P”) is treated as taking a relevant step within paragraph 1 (“the initial step”) by reason of making a loan or quasi-loan, and
(b) an election has been made by A for the purposes of this paragraph.
(2) P is treated as taking two further relevant steps for the purposes of Part 7A of ITEPA 2003.
(3) P is treated as taking one of the further steps on the first anniversary of the date on which P is treated as taking the initial step.
(4) P is treated as taking one of the further steps on the second anniversary of the date on which P is treated as taking the initial step.
Mel has calculated that he has a loan charge amount of £75k. He makes the election to spread over 3 years.
Under the unamended rules, he had one relevant step on 5 April 2019. The amount taxable was £75k. Tax year 2018/19 and due, originally, 31 Jan 2020.
The election means that he has three relevant steps:
- 5 April 2019
- 5 April 2020
- 5 April 2021
And his total loan charge liability is split evenly across these three steps. So, 3 x taxable amounts of £25k.
The amounts will fall in the tax years:
- 2018 / 2019,
- 2019 / 2020 and
- 2020 / 2021.
The payment dates of:
- 30 September 2020;
- 31 January 2021; and
- 31 January 2022
|Date of relevant step||Amount||Relevant tax year||Payment date||Revised payment|
|5/4/19||£25,000||18/19||31 Jan 2020||30 September 2020|
|5/4/20||£25,000||19/20||31 Jan 2021|
|5/4/21||£25,000||20/21||31 Jan 2022|
A practical point to bear in mind is the knock-on effects that this might have on payments on account for the next tax year. For example,
delaying the 2019 to 2020 payments on account could leave you with a large sum to pay at 31 January 2021. You can make payments towards this liability at any time and in any amounts to reduce the sum becoming due 31 January 2021.
Finally, it is also worth noting that suffering the loan charge does not extinguish and close an earlier enquiry or assessment, opened under the existing Part 7A disguised remuneration legislation.
Therefore, any tax payable under the existing Part 7A disguised remuneration provisions and the corresponding late payment interest will remain payable, although credit will be given for tax paid under the loan charge.
However, what must be considered when deciding whether to suffer the loan charge per the 3-year spreading is the underlying tax liability relating to the open years. For example, in earlier years the additional rate was 5% higher than the current additional rate and therefore, this could leave outstanding tax payable, despite the taxpayer choosing to suffer the loan charge.