The 2019 Loan Charge: Considerations ahead of the 30 September deadline

Author

Thomas Slipanczewski

A tax adviser, Thomas joined ETC Tax in September 2018.

Now that the Finance Act 2020 has been given Royal Assent, it is unlikely that any substantive changes will be made to the 2019 loan charge, prior to the 30 September 2020 deadline, despite many remaining hopeful.

Resultingly, affected taxpayers must ensure that they understand their position and take the necessary steps to ensure that they meet the requirements imposed by the law, by 30 September. Where they do not do so, they may face significant penalties.

Background

Over the last few years, as a firm, we have offered a detailed commentary in relation to the 2019 Loan Charge as it has evolved. As such, I do not propose to repeat any of this here.

However, it is worth restating the most recent changes made, following on from the Government’s response to Sir Amyas Morse’s independent Loan Charge review.

The key revisions to the loan charge were as follows:

  • The loan charge will only apply to relevant, outstanding loans, made on or after 9 December 2010 (instead of 6 April 1999).
  • The loan charge will not apply to any outstanding loans made between 9 December 2010 and 6 April 2016 where a reasonable disclosure of the scheme has been made and HMRC did not take steps to recover any relevant amount.
  • For taxpayers suffering the loan charge, instead of reporting all loans on the 2018-19 return, the loans may be split into 3 and 1/3 may be reported each year for 2018-19, 2019-20 and 2020-21.
  • Where a taxpayer has already settled and their loans now fall outside of the loan charge, following any of the above changes, they will be refunded any relevant amount.

Where a taxpayer has a liability under the loan charge, they must report their liability on their Self-Assessment Tax Return and pay the relevant amounts by 30 September 2020, unless they reach settlement with HMRC.

Areas to consider

Open/protected years

We consider that open years are the single biggest factor in deciding the appropriate steps to take in relation to the loan charge, or settlement more generally.

An open year is a tax year that HMRC has issued an enquiry notice or discovery assessment or is still within time to issue an enquiry notice or discovery assessment.

Where a taxpayer suffers the loan charge, this does not close any open year.

The only way to close an open year is to settle with HMRC. Therefore, HMRC may seek to recover any unpaid interest on an open year, even where a taxpayer has suffered the loan charge. This is particularly relevant where:

  • There was a higher effective rate of tax in the open/protected year;
  • Interest is payable; and/or,
  • The tax payable on the loan charge is less than the open/protected year, i.e. because the taxpayer has now retired.

Any tax paid under the loan charge will be credited against any amount payable in relation to an open year.

In its response to the Morse Review, the Government has confirmed that it will seek to recover any amounts payable in relation to loans received prior to 10 December 2010, where the taxpayer has open years.

Therefore, where taxpayers’ loans now fall outside of the loan charge because they were received pre-10 December 2010, settlement should be considered where the taxpayer has open years and where the taxpayer:

  1. Does not wish to litigate the merits of the scheme;
  2. Does not have any credible substantive challenge in relation to a tax administration or formality, such as seeking to argue that a historic discovery assessment is invalid; and/or,
  3. Would require a payment plan to repay the amounts owed and/or, does not have the money to repay the amounts owed.

Loans reasonably disclosed

Where taxpayers have received relevant loans between 9 December 2010 and 6 April 2016 where a reasonable disclosure of the scheme has been made and HMRC did not take steps to recover any income tax payable, the taxpayers’ loan charge liability attributable to this period will reduce to Nil.

A taxpayer will be deemed to have reasonably disclosed their loans on their return where:

  • The loan was identified;
  • The recipient was identified;
  • The arrangements were identified; and,
  • Any other necessary information required so that it is apparent that a reasonable case could be made that the recipient was chargeable to income tax on the loan.

A return is defined as a Self-Assessment Tax Return and accompanying accounts, statements or documents and a CT600.

Taking steps to recover any income tax payable is not defined within the legislation. However, HMRC guidance suggests that, in its view, this would include “opening an enquiry or issuing an assessment or determination”.

Note, even where there has been reasonable disclosure, where the relevant year is open/protected, the loan charge will apply.

Spreading the Loan Charge over 3-years

Instead of suffering the loan charge in 2018/19, the legislation now provides that a taxpayer may instead split their outstanding loans into thirds and use 1/3 of the outstanding loans in 2018/19, 2019/20 and 2020/21.

This effectively provides for a 3-year payment plan. However, because the taxpayer is required to make payments on account, and this may result in the taxpayer having to pay a significant amount of tax between September 2020 and 31 January 2021 and therefore, this offers minimal assistance to taxpayers who cannot afford their liability.

Example:

Mr. Smith has calculated that he has £75,000 worth of loans falling within the loan charge. Instead of suffering the loan charge in 2018/19, he instead decides to split his loans across 2018/19, 2019/20 and 2020/21. Therefore, he will include £25k worth of loans on each return.

As the loan charge deems any outstanding loans to be income, Mr. Smith must make payments on account in relation to this [deemed] income. Mr. Smith will have the following payment dates:

Tax Year Loan Amount POA 1 POA 2 Balancing Payment
2018/19 £25,000 30 September 2020
2019/20 £25,000 31 January 2020 31 July 2020 31 January 2021
2020/21 £25,000 31 January 2021 31 July 2021 31 January 2022

N.B. Where a taxpayer does not make the payment on account on 31/01/20 and 31/07/20, as long as the balance is paid by 31/01/21 or a payment arrangement is agreed, no interest will be chargeable.

Refund of settled amounts where the Loan Charge no longer applies

Where a taxpayer has settled in relation to their loan charge liability between 16 March 2016 and 11 March 2020 and consequently, their arrangements fall outside of the loan charge following the Governments’ response to the Morse Review, HMRC will repay any amounts paid.

Specifically, repayments will be offered where:

  1. 1The taxpayer has pre-10 December 2010 loans and HMRC did not have the power to recover the income tax and NIC; or,
  2. The taxpayer has received loans between 10 December 2010 and before 6 April 2016 and a reasonable disclosure was made and HMRC did not have the power to recover the income tax and NIC at the time that the settlement agreement was made.

Note – ‘power to recover’ will include enquiries or assessments. Therefore, where a taxpayer has open years, they will not be due a repayment.

If you have any queries regarding this article, the loan charge in general, or any other tax matters, then please get in touch with Thomas or one of the team.

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