Ostrich time approaching
Normally at this time of year if you had to choose, you’d rather be an ostrich than a turkey as the odds of surviving would be significantly greater. But the sands of time are fast ebbing away from clients who are affected by the loan charge legislation which comes into effect at the end of 5th April 2019. Now is not the time for either the accountant or their client to stick their head in that proverbial sand as the repercussions are so vast.
What is the loan charge?
You will find it sat at Schedule 11 Finance Act (No.2) 2017 with some supplementary changes reflected at Schedule 1 Finance Act 2018. It all interlinks with the Disguised Remuneration legislation of Part 7A ITEPA 2003.
In basic terms the loan charge could apply if, since 6th April 1999, a Third Party has made ‘employment income’ loans to an individual (usually a director or a contractor), either directly or indirectly, which is still outstanding as at the end of 5th April 2019. If caught by this legislation, effectively, PAYE would need to be operated on this deemed employment income. Failure to do so would result in penalties being imposed.
The wording of the legislation is widely written with the likely candidates companies, directors, employees and contractors who used trust vehicles like EBTs, EFRBS, SPTs or RTs to extract monies out of the company and for the Trustees to provide loans out of the Trust directly or indirectly to a beneficiary. However, it could equally be a Third Party like a company or commercial lender who is found to be in cahoots with the individual and/or the company entering into lending arrangements with a primary tax avoidance motive. Likewise quasi loans could be caught. These are loans where, for example, the employer may have rewarded the individual with an asset like gold bullion subject to him or her agreeing to take on board the employer’s obligation of a debt owing to, let’s say, a trust.
There’s no need to worry if the loan has been repaid before 6 April 2019. If the repayment was made after 16th March 2016 it will need to have been done so in cash and evidenced as such with HMRC.
Likewise, not a problem if the loan has been made on normal commercial terms and there are no tax avoidance motives attached to that lending.
The problem is avoided if the loan is deemed to be an approved fixed term loan. There are a number of hoops to jump through in this case, one of which is it has to be approved by HMRC.
You could also try to demonstrate to HMRC and if necessary the Courts that, irrespective of the above exclusions not applying, the loan in question is not caught by the Disguised Remuneration legislation.
Important to note
Your client could be under enquiry already over the original planning. In this respect, the loan charge is separate to that in the sense he or she could win the argument on the original planning and still be liable to pay the loan charge, or vice versa, or both scenarios could be caught. If the latter applied then there would not be a double tax charge but the greater liability would need to be paid across. Remember if the client hasn’t had an enquiry on the original planning he can still be hit for the loan charge.
Strictly the employer needs to operate PAYE on this deemed earned income but the Third Party and the individual are complicit in providing the necessary information to said employer to be able to do this. HMRC also take the view that if the employer no longer exists or is reluctant to do so (for example an overseas employer) then they can pursue the individual for that liability.
If the company operate PAYE on the ‘loan’ and the tax is not subsequently refunded back to the company by the individual, HMRC might try to tax him or her on the tax under S222 ITEPA 2003.
If the company has received an APN (Accelerated Payment Notice) and has paid the disputed tax over to HMRC, assuming the amount is at least in line with the potential loan charge then the company can request from HMRC a postponement of the loan charge until the disputed tax issue has been resolved.
What are the options?
There are a number of options, none of which are totally palatable.
a) Pay the loan charge. Remember the enquiry on the original planning may still come to bite the client on the posterior, albeit no double tax charge should arise. Also note that if the client has had these sorts of loans over a number of tax years they will be aggregated together in the 2018/19 tax year when applying the loan charge.
b) Don’t pay the loan charge and argue that it is not caught by the legislation. The original planning could still be attacked.
c) Repay the loan back to the Third Party before 6th April 2019. Note that any repayment of the loans will be disregarded if there is any connection between the repayment and a tax avoidance arrangement. The original planning could still be attacked.
d) Enter into a settlement with HMRC on the original planning. Expressing an interest now to settle would not guarantee that the loan charge could not still come into play due to the tight timescales involved but that could be part of the opening gambit regarding the settlement negotiations with HMRC. This might spread the liability over several tax years but, of course, interest will run from an earlier date. There would also be no come back if the original planning was later proved to succeed.
e) Become an ostrich and stick the head in the sand. Not to be recommended. It won’t go away.
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