There are all sorts of schemes that employers and promoters will set up in a bid to make money out of workers remuneration by not paying tax and National Insurance contributions on their income. Employees and individuals signing up to these schemes also benefit by having less tax deducted from their income.
HMRC calls such arrangements ‘disguised remuneration’ schemes; a system whereby taxable income is disguised as something else, often loans, EBT schemes, EFRB schemes, annuity or share schemes which are contrived to seem that the income is not taxable.
In the vast majority of cases such disguised income is almost always taxable, and HMRC will pursue the individuals that signed up to these schemes for the unpaid tax and NICs on their income.
You can read more about disguised remuneration schemes here.
Disguised remuneration schemes cost the Treasury millions every year in lost taxes; the knock-on effect of which means less investment in vital public services.
To tackle disguised remuneration schemes, the Loan Charge was introduced in the Finance Act 2016, becoming law on 5 April 2019. However, following criticism of the application and effect of the loan charge on some to whom it was applicable, an independent review of the rules was undertaken and amendments to the rules announced in December 2019.
The Loan Charge is intended to tackle tax avoidance and claw back some of the losses that resulted from disguised remuneration schemes.
The government believes an estimated 50,000 people have used a loan scheme and will be affected by the Loan Charge, and that the policy would raise over £3 billion.
More about the Loan Charge
So, how does the Loan Charge actually work?
HMRC says it has never approved disguised remuneration schemes and says they simply don’t work. This is a controversial point in itself because scheme promoters often have QC opinion that they do work, and some also claim to have defeated HMRC.
However, whether or not the schemes have previously been acceptable is irrelevant as the loan charge has been brought in to deal with them. Many people believe that this is retrospective taxation, however it doesn’t go back and change the tax treatment of past events. Instead it creates a tax effect today on past events that remain outstanding, such as loans.
The Loan Charge has been created to add together all outstanding loans received by an individual, and tax them cumulatively as if all the income had been received in one year. It applies to any loan outstanding as at 05 April 2019 which was made after 09 December 2010 and for which a reasonable disclosure of the use of a relevant scheme was not made to HMRC before 06 April 2016 in respect of which HMRC took any action.
Those found to owe a loan charge sum to HMRC, can elect to spread that sum evenly across 3 tax years from 2018 to 2021. This could result in a lower rate of tax applying to the sum due. However, if an election was made to spread the outstanding loan balance in this way, a copy of the election should have been given to the employer by 30 September 2020.
Important update – late elections now possible
The controversial loan charge originally required taxpayers to declare any outstanding loans by 30 September 2020. HMRC has now announced that it will automatically any late elections received on or before 31 December 2020. This will enable affected individuals to spread the amount due evenly through the 2018/19, 2019/20 and 2020/21 tax years.
From 1 January 2021, HMRC will consider late elections on a case by case basis, in exceptional circumstances that were beyond the individual’s control.
How to pay
Flexibility has been introduced over ways to pay.
If the paying party does not have disposable assets and has an income of less than £50,000 in the 2017 to 2018 tax year, time to pay arrangements for a minimum of 5 years will be agreed by HMRC.
If the paying party has an income of less than £30,000 in the 2017 to 2018 tax year, time to pay arrangements for a minimum of 7 years will be agreed by HMRC.
If the paying party has an income of more than £50,000 in the 2017 to 2018 tax year, or a paying party needs longer to pay, HMRC will require detailed financial information to enable arrangements to be discussed.
HMRC has stated that there is no maximum time limit for a time to pay arrangement and that in most cases, a paying party will not pay any more than 50% of their disposable income to it, each month.
In short, those that participated in a disguised remuneration scheme had three options:
- Repay the original loan.
- They could agree to a settlement with HMRC.
- They could pay the Loan Charge when it came into force in April 2019.
How far does the Loan Charge go back?
Originally, the Loan Charge was designed to cover disguised remuneration loans that went back as far as 1999, and were still outstanding by the time the Charge was introduced on 5 April 2019. However this has since changed as outlined above.
The Loan Charge wasn’t without its controversies, though, with critics saying it was unfair to retrospectively tax income going back 20 years, particularly considering that HMRC investigations usually only go back 6 years.
In addition, some experts question the validity of claiming tax on schemes that may have been perfectly legal at the time individuals were signed up to them.
HMRC has denied these accusations though, highlighting that the Charge does not change that past liabilities were due on what were, essentially, disguised income payments.
HMRC also made it clear that the Loan Charge applied to anybody and everybody who had participated in a disguised remuneration scheme, saying in its March 2016 policy paper:
‘The users of these schemes vary as much as the schemes themselves. They include both employed and self-employed individual contractors, small businesses employing a few staff, and highly paid individuals seeking to avoid large sums of tax and NICs.’
A key point that HMRC’s arguments do not take account of is that many people were unwittingly duped into signing up to these schemes, and therefore genuinely did not realise that tax was due on their income.
HMRC is largely unsympathetic as they believe that all taxpayers are ultimately responsible for ensuring that adequate tax is paid on all of their income, and that ignorance is no defence.
Whether or not those affected by the loan charge are wealthy individuals deliberately avoiding tax, or innocent people caught up in a scam, the fact remains that the loan charge amounts due are life changing and eye-wateringly high for most people.
This has led to severe mental distress for some people who have very real concerns about possibly losing their house or other assets in order to pay their debt.
If you are affected by the loan charge, we recommend that you check out the Loan Charge Action Group (LCAG) who continue to raise awareness and campaign against it, www.hmrcloancharge.info
Please note that they are unable to provide professional advice for individual situations, but their website is a useful source of information and support.