Meredith McCammond from the Low Incomes Tax Reform Group (LITRG) looks at some of the practicalities around how the loan charge will be applied when it comes into force on the 5 April 2019.
Those on low incomes realistically have two options:
- pay the loan charge; or
- try and voluntarily settle any income tax that they owe with HMRC before the loan charge comes into effect on 5 April 2019.
In December LITRG published an article exploring HMRC’s settlement option (which is likely to be in the best interests of most lower paid workers). However, time is running out for people to initiate the settlement process, so let’s consider what the loan charge option might look like instead.
Note HMRC’s guidance on how it will deal with loan charge cases in practice is evolving, so this article is based on LITRG’s current understanding of the position, which could change.
The loan charge means that HMRC will get a second chance to tax any ‘disguised remuneration’ loans made since 6 April 1999.
There are many complexities as to how this charge will be applied but basically, in the absence of any action taken to ‘settle’ beforehand, HMRC will treat an amount equal to the value of all outstanding loans as employment or self-employment income arising on 5 April 2019.
For employment-based schemes, the outstanding loans should be declared by employers (that are onshore and still in existence) via their RTI returns.
Individuals will be required to provide as much information as they can about the loans they have received to employers (both former and current), to make sure they are all captured – by 15 April 2019 at the latest.
We understand HMRC is in the process of writing to the taxpayers and employers it is aware of, to explain more around the notification requirements.
The income tax, NIC and student loan repayment amounts due will fall to be paid by the employer on 22 April 2019, as the usual payment date for month 12 of 2018/19 (but will inevitably get passed on to the worker).
Transfer of liability
Where the employer is offshore, or where the employer no longer exists, the individual taxpayer will be responsible for reporting the outstanding loans and paying the tax to HMRC via their 2018/19 tax return. They must also tell HMRC separately about the amount of their outstanding loans by 30 September 2019. We understand this is likely to be via an online form on GOV.UK.
HMRC will be running a compliance process to ensure that it has received the correct loan charge ‘returns’ from the people it expects to get them from.
In cases where the employer is onshore, and is still in existence but is unable to pay, HMRC will issue a formal bill to the employer in respect of the unpaid tax. Once this bill has been unpaid for 30 days, HMRC will try and collect the tax from the individual directly.
How much will be payable?
The amount of outstanding loans will be put together and taxed as employment income all in one year (2018/19), so the total will be taxed at the individual’s marginal tax rate. As the amount is assessed in one lump sum, it will benefit from only one years’ worth of allowances and tax bands.
In most cases, the loan charge will be payable in line with the normal tax return process – meaning any tax due will need to be paid by 31 January 2020. Provided any tax is paid by this date, there will be no interest or penalties.
With regards to hardship, we are unaware of any special arrangements to be made available (eg five-year ‘no questions asked’ payment plans, similar to those offered during the settlement process).
However, at the very least, HMRC should deal with loan charge cases in line with their general debt strategy, which means that time to pay arrangements should be available and those vulnerable taxpayers should be given special consideration.
What else will the income count for?
As the loan charge will be considered an employment income, this may also trigger things like the high income child benefit charge, and stop parents from opening tax-free childcare accounts. In addition to triggering higher rates of tax and student loan repayments, it could also cause loss of the personal allowance.
Our understanding is that the loan charge should not be counted for tax credits and Universal Credit. Employers should enter the income in a specific RTI field – so that it is separated from any normal employment income, which will otherwise flow through to the tax credit/UC system.
To get a better understanding of what all this might mean for an individual, see the examples that LITRG put together, which examine likely loan charge figures across a number of different scenarios.
Although most people will be better off by settling with HMRC, in some cases where there is no open enquiry or tax assessment, they might be better off paying the loan charge.
For example, if the taxpayer was only in a loan scheme for a short period of time and their income is from one year only, they may pay less tax under the loan charge than if they settle, as interest/penalties will not be due. There is also the cash flow benefit of not having to pay until 31 January 2020.
However, there are other factors to consider; settlement could bring earlier certainty and a lower administrative burden, but anyone wanting to settle will need to be quick and get all their information to HMRC before 5 April 2019.
It is important to note that even if the taxpayer pays 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, this can mean that the taxpayer ends up having to pay the higher amount. People need to weigh things up carefully.