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What to expect from the 2019 loan charge

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15th Feb 2019
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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:

  1. pay the loan charge; or
  2. 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 basics

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.

Examples

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.

No closure

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.

Replies (64)

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By justsotax
19th Feb 2019 14:58

I would add something else....everyday/week there are clients who will query the bill...no matter how small (fee sensitive/service sensitive etc). Yet whenever I see these schemes £000's have been paid in fees with what seems to be little or no resistance....!?

David12345 - I guess you will probably be able to provide the answer for that - value for money?

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By PSTEN
19th Feb 2019 15:16

There was little or no resistance because the fees were not paid directly out of the account of the 'client'. In many cases the 'client' just saw a larger number appearing in their bank account than they were used to, very few people question why they are getting more money, you have to remember that many of these contractors were working long hours in their own industry and spending hours researching tax law was not a priority.

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By justsotax
19th Feb 2019 16:25

I guess I wouldn't question things if I simply saw more money in my account than my payslip said I should be receiving....call me ignorant....apparently that's fine....FFS?!

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By PSTEN
19th Feb 2019 17:00

Which Pay slip would you be looking at? The one from your own personal service company you previously used where you were receiving a small salary? The rest having been taken as a dividend, or I expect in many cases just transferred from the company bank account to your own personal account with the accountant set to sort it out a long way after the end of the year. How would you know what amount of tax (and NI) you would be paying had the whole amount gone through PAYE, rather than as a small salary and a loan or do you expect everyone who was in these structures to be running their own payroll system just to check.

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By PSTEN
19th Feb 2019 17:00

Which Pay slip would you be looking at? The one from your own personal service company you previously used where you were receiving a small salary? The rest having been taken as a dividend, or I expect in many cases just transferred from the company bank account to your own personal account with the accountant set to sort it out a long way after the end of the year. How would you know what amount of tax (and NI) you would be paying had the whole amount gone through PAYE, rather than as a small salary and a loan or do you expect everyone who was in these structures to be running their own payroll system just to check.

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By David12345
19th Feb 2019 22:33

We were recommended a scheme by an established specialist accountancy practice that employed ex HMRC “ tax specialists” who liaised with colleagues still in the employ of HMRC . It was “sold “ as a well established practice for a considerable fee. This post isn’t about criticising the vast majority of good practitioners out there. It’s a statement as to what happened to busy genuine small / medium sized businesses , who were not experts in this field , whose own smaller accounting practices didn’t profess to have the necessary expertise in complex tax planning. HRMC had a duty of care to act as soon as such schemes were mooted - let alone implemented. The Revenue cannot now pretend they didn’t know what was happening as it was their former employees that were selling the schemes in cahoots with their very own employees. The whole tax system is way too complicated/costly now and needs a radical overhaul as its penalising smaller businesses .

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By Exfoliate
20th Feb 2019 08:32

Entrepreneurs are busy yes, but surely the word 'loan' would send an instant message to any intelligent entrepreneur? A properly constituted loan arrangement with security, commercial interest and commercial repayment conditions should be part of that loan and in that case it's pretty obvious it's a "loan". Flies, floats and quacks and all that.
If it's on the basis of a nod and a wink that you never have to repay it, that's entirely different and for so called 'tax specialists' to charge huge sums for that advice was entirely wrong.
What we as entrepreneurs feel aggrieved about is HMRC did not act swiftly enough and allowed this mess to develop unchecked and then got the Government to introduced retrospective powers for HMRC to collect the tax from individuals and to go back and re-introduce out of time limits. Sweeping powers to cover their own muck up and to boot allowing them to interfere in properly and legally constituted loan contracts between two independent parties which were most certainly not 'disingenuous loans' derived to deprive the taxman of his cut. I agree entirely the tax system has become way too complicated, as is the law. But sadly as the saying goes, there's a law but there's no justice.

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By justsotax
21st Feb 2019 11:48

comes back to one thing....so you knew you took a loan....when you paying it back!

(I presume these people have taken mortgages from banks, and realise that the deal is the capital has to be repaid at some point)

Sympathy definitely for being forced to settle by a date determined by the idiots in charge though.

But unfortunately these things don't happen by accident - it requires a lack of responsibility at all levels. Those in charge who didn't see what was happening, those inventing the schemes to make a quick buck, those pushing the schemes to get a kick back and those blindly buying into the schemes.

Its tough to take it I realise, but you need to have some empathy with the majority of advisers who had no involvement in these schemes yet appear to be clubbed together as being part of the problem.....

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By I J Lessels
21st Feb 2019 15:27

There has been a failure by HMRC to get on with dealing with this. Along with a general failure to deal with most of the things they are supposed to do. This seems somehow to have coincided with the loss of most of their knowledgeable old Inspectors and their replacement by a few low-paid bods in call centres. The loss of personpower (is that a word? It is now) is not an issue to be dismissed.

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By Peter Bromiley
25th Feb 2019 11:49

Not everyone affected is a hard-nosed tax dodger. There are actually some innocent victims. I know of a person from an African country who worked here in Social Work for councils via Agencies - on fairly low pay. Her first Agency recommended an Umbrella company which happened to be one that paid her NMW + loans. She had no idea she wasn't complying with the law.
She got shifted from one Umbrella company to another being reassured everything was fine. One of these Umbrella companies was based in Valletta - so not much chance of HMRC nailing them.
She came to see us for advice once she had the loan charge letter - and was stunned to learn she owed many thousands of pounds (which of course she doesn't have).

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Replying to Peter Bromiley:
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By justsotax
26th Feb 2019 09:53

nobody said they were tax dodgers...although bizarrely all have the same in common...they actually paid very little tax on their income....but I guess they overlooked that....(again this is specialist scheme providers we are talking about, and yet the average joe bloggs accountant is expected to feel some empathy or even guilt for what "their" profession is responsible for when actually the majority of scheme providers are not actually accountants, but are made up of barristers etc.....

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By AndrewV12
28th Feb 2019 12:29

Why would anyone on low incomes enter such schemes, surely if they do not earn much there tax affairs should be fairly simple and so such their tax liabilities.

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By justsotax
04th Mar 2019 16:34

I know Andrew, its bizarre....albeit I presume they were forced into using a Ltd Co (which may be a requirement of their contract)….and then forced to 'remunerate' themselves via a loan (less convincing argument on this said)...I presume they are all migrants and therefore need to be lead by these cheapskate accountants....(the ones who have the barristers in their pockets)…

All these schemes have one thing in common - it involves a loan...yet at every stage HMRC/local accountant etc is to blame...yet it never seems to be addressed that the loan will at some point be repayable.....funny that....

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