Government downgrades loan charge measures but may be back in the Budget
The government has made substantial changes to its loan charge measures following an independent report into the controversial legislation. However, a line in the report hints that we may see the government return for a second bite at the cherry in the next Budget.
Firstly, the loan charge will apply only to outstanding loans made on or after 9 December 2010. The original scope was set to go back to April 1999, but the date has been moved to when, in Morse’s opinion, the government first announced its opposition to such arrangements.
The loan charge will also not apply to outstanding loans made in tax years before 6 April 2016 where the scheme was fully disclosed to HMRC and no action was taken.
Also, where an individual has fully disclosed outstanding loans made in tax years before 6 April 2016 to HMRC and the tax authority failed to take action, the loan charge will not apply.
On Morse’s recommendation, taxpayers are entitled to spread their outstanding loan balances over three years. This is to mitigate the impact of potentially paying tax at a higher rate than they ordinarily would.
HMRC will also refund voluntary payments made by individuals to prevent the loan charge from applying.
Sir Ed Davey, Liberal Democrat MP and Chair of the Loan Charge APPG in the previous Parliament, welcomed the news that the “draconian loan charge legislation” will be significantly amended.
However, Davey went on to state that he still believes there are “injustices” which will need further changes, including the removal of all aspects of retrospection.
“I intend to re-establish the Loan Charge APPG for the new Parliament to examine these proposals in more detail in the New Year and we will seek to work constructively with the Government before and during the passage of the legislation when it comes before Parliament,” concluded Davey.
A second bite at the cherry?
While those involved with loans made before 2010 will not now be subject to the loan charge, the government hinted in its response to the Morse report (par 2.13) that it may seek to find another route to extracting what it sees as tax due.
The government stated it will create 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.”
This, according to the response, “ensure people who entered into DR avoidance schemes before 9 December 2010 still pay the tax due”. More details of this will be revealed in the next Budget, likely to be in February.
Walking a fine tightrope
Commenting on the changes, leading tax barrister Keith Gordon told AccountingWEB that it appears Morse has “attempted to walk along a fine tightrope between a dislike of tax avoidance and fairness to taxpayers”.
“Although my personal preference would have been for the loan charge, if retained at all, to have been given effect as of 2016 onwards, he has limited its retrospective effect to 2010,” said Gordon.
The 2016 date referenced by Gordon refers to documents released in the aftermath of the 2016 Budget, proposing to impose a retrospective tax on contractors’ loans.
However, the government have adopted the date of 9 December 2010, when the law about the tax treatment of loan schemes became, in Morse’s opinion, clear and the government first announced its opposition to EBT-based arrangements. This, according to Gordon, represents “an understandable, but still regrettable, compromise”.
Levels of disclosure
The Morse report recommended that the people involved in arrangements between 2010-16 should be excluded from the loan charge if they have made ‘reasonable disclosure’ of their scheme usage. This, commented, Gordon, seemed to represent a “sensible additional safeguard” for taxpayers.
However, the government has modified the proposal, requiring ‘full disclosure’ on the tax returns. This, according to Gordon, represents a significant difference, as full disclosure is likely to be more than the statutory requirement need.
“Why should someone be penalised for something they weren’t required to do?” commented Gordon. “Not every taxpayer received a tax return, so they didn’t have the opportunity to make a disclosure.”
Immediate tax return conundrum
Jon Claypole, tax partner at BDO commented that despite the timely announcement ahead of the festive break, those impacted should seek independent advice, in particular regarding the very immediate conundrum on what this means for filing 2018-19 tax returns.
“The government is allowing tax returns in certain circumstances to be filed by 30 September 2020 without incurring interest and late filing penalties,” said Claypole.
“It is key to bear in mind that the legislation is yet to be attested, but this review appears designed to make The loan charge more equitable, with many campaigners perhaps playing a key role in highlighting the scale of the ramifications to those set to be impacted.”
A brief history of the loan charge
The loan charge was designed to encourage taxpayers to pay income tax, national insurance and interest which HMRC believes to be due on loans they received in years going back to 1999. HMRC refers to those loans as “disguised remuneration” on the basis that they were never designed to be repaid, and hence the loaned amount should be taxed as if it was salary paid in the year it was provided.
Many taxpayers did not agree with HMRC’s view of the loans, and if they did agree they believed that the employer should be liable for the tax and NIC on the loan, rather than the individual. Arguments ground though the courts and in some cases HMRC did not act quickly enough to challenge the tax treatment before tax years were closed to enquiries.
The loan charge was proposed in the 2016 Budget to close down all the arguments about disguised remuneration, one flavour of which is contractors’ loans. All taxpayers who had not agreed their tax liabilities in respect of disguised remuneration loans by 5 April 2019 would have to pay the loan charge imposed at that date.
The loan charge taxes all outstanding loans as if the amounts were received as salary in 2018/19. The professional accounting bodies, including ICAEW, raised strong objections to the draft law, pointing out that taxpayers would become insolvent. However, the law was passed after the 2017 general election in the second Finance Act for that year.
Although an initial review into the charge was commissioned after an intervention by the LCAPPG, its findings were dismissed as a 'whitewash'. This prompted a second, independent review following a pledge from incoming Prime Minister Boris Johnson.
The Morse review was due for publication in November but was delayed by December’s general election.