Five things for those facing the loan charge
Meredith McCammond looks at some of the main changes being made to the loan charge and clears up a few areas of confusion.
If you have clients who are facing the loan charge there are five important things to note:
1. The tax return deadline
Taxpayers can file their 2018/19 tax return and pay the loan charge and any other tax due (or arrange a payment plan) by 30 September 2020 (rather than by 31 January 2020), without penalty. This also applies to those settling or not paying the charge but with ‘loan charge’ issues, such as those whose charge now falls away following the review.
HMRC’s original guidance was not clear that this meant all tax (as opposed to just loan charge related tax), but HMRC has confirmed that they do, indeed, mean all tax. Taxpayers may, however, receive auto-generated interest charges and penalty notices, which can be dealt with by calling 03000 599110.
Taxpayers can also delay paying any payments on account for 2019/20 (or arrange a payment plan to do so) by 31 January 2021 without penalty (as opposed to 31 January 2020 and 31 July 2020).
2. Additional information form
Taxpayers facing the loan charge should make sure that they complete the additional information form on Gov.uk, if they have not done so already.
This form to report the loan is currently being updated and the new version will be available from April 2020 – the deadline for completion has been extended to 30 September 2020. Those who have previously completed it, do not need to amend it even though their loan charge liability may have now changed.
If taxpayers want to make the election to spread the loan charge (see below), they will need to do this via the additional information form.
3. Spreading provisions
Once taxpayers have taken into account the changes to the design of the loan charge (in terms of the removal of ‘unprotected’/fully disclosed years), taxpayers can, if they wish, make an irrevocable election to spread their remaining loan income over three years.
This means that rather than have all their outstanding loans treated as income in the 2018/19 tax year, they can have one third treated as income in 2018/19, a third in 2019/20 and a third in 2020/21.
This could save taxpayers money, especially if they are on a lower income and do not have any open enquiries/assessments (see below) as this may help them avoid paying higher rates of tax, triggering the HICBC, losing their personal allowance etc.
However, if the saving is significant it seems possible that HMRC might use enquiry or discovery powers to pursue the tax if it is able to (see ‘Double taxation’ below).
4. Time to pay
Where a taxpayer has ‘no other sources of wealth’ and they earn less than £50,000, they should be automatically entitled to a minimum of a five-year time to pay (TTP) plan. Where the taxpayer earns less than £30,000 the payment plan should be over a minimum of seven years. To discuss TTP plans with HMRC, call the loan charge helpline on 03000 599110.
We understand that if a taxpayer spreads their loan income and needs a TTP for all three years, they could get an ‘automatic’ deal for year 1, and then roll the charge for year 2 and year 3 into it, rather than get three separate ‘automatic’ deals. However, it may be possible to renegotiate the terms or extend the payment term at those points.
Note the ‘no other sources of wealth’ restriction does not apply to the ‘no questions asked’ payment arrangements for those settling. We asked HMRC whether this is an intended point of difference – it is, but in reality, (given ‘wealth’ wouldn’t include assets like a normal family car, etc), we would have thought the vast majority of people should have the same experience.
Bespoke payment plans are available based on an income and expenditure assessment (the form HMRC use is available gov.uk). Taxpayers should only be asked to pay up to half their disposable income each year and a reasonable proportion of their liquid assets (for example, savings or investments) unless they have very high levels of disposable income.
Interest (currently 3.25% per annum) will be payable on any TTPs made. If there is a change in the interest rate, strictly, it applies to TTPs. In practice, however, HMRC will not seek to rearrange the TTP, but will consider whether to seek further interest due at completion of the TTP. HMRC have informed us that where the amount is marginal, they will not pursue this additional interest.
5. Double taxation
It is very important to note that even if taxpayers pay the loan charge, HMRC can continue with any open enquiry or assessment of earlier years. Although there should ultimately be no double taxation, if the amount agreed or assessed is higher than the loan charge this can mean that they end up having to pay the difference.
In order to get a better understanding of the developments, see the examples that we put together at the end of our recent LITRG article.
You might also be interested in
Meredith McCammond is a Technical Officer for LITRG and Chartered Tax Adviser, formerly in practice. LITRG is an initiative of the Chartered Institute of Taxation which is a charity. Since1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated...