Loan charge: Voluntary restitution repayments – part two
In part two on repayments of voluntary restitution, Meredith McCammond explains the double tax provisions that apply in voluntary restitution cases. People who fall outside of the loan charge may still face potential tax charges arising in the future, she warns.
The new scheme allows HMRC to refund (or waive) an amount that was settled 'voluntarily' to avoid the loan charge. This scheme applies to settlement agreements made before 11 March 2020, in relation to loans made in unprotected years.
Subsequent loan write off – double tax provisions
Many of the taxpayers who receive a refund or waiver under the scheme may simply want to close this chapter of their lives completely by arranging for the loan to be written off by the trust. However, there has been a question bubbling over whether refunded or waived years will still have ‘protection’ that a subsequent loan write off won't, of itself, trigger a tax charge.
As many of the loans were originally advanced on the basis that tax was deferred until the loan was written off, the disguised remuneration rules (ITEPA 2003, Part 7A) result in the write-off or waiver of a loan being a relevant step (as described in the EMI46105).
Although writing off an outstanding loan, may mean there is more tax to pay, there are double taxation relief provisions which mean that any tax paid under a settlement or the loan charge is available to 'frank' the subsequent charge. However, what happens where there is a subsequent write off in a voluntary restitution refund or waiver case?
Under the rules (paragraph 9), where a repayment/waiver is made under this repayment scheme, relief will be given under ITEPA 2003 s554Z5 if there is a later relevant step under ITEPA 2003 Part 7A such as the write off of the loans.
Didn't settle by 11 March 2020?
The position for people who did not enter into a settlement agreement with HMRC before 11 March 2020 is different. No such double tax relief is available and they will therefore be subject to the usual tax charges that apply under ITEPA 2003 Part 7A for write-off of loans.
Bearing in mind HMRC contacted taxpayers in autumn 2019 to ask them if they wanted to pause settlement, pending the outcome of the Morse review (and the announcement of HMRC's position which was made on 11 March 2020), this situation will potentially impact many people.
HMRC has confirmed that anyone who subsequently decided to continue with their settlement for voluntary restitution post 11 March 2020, and who settled by 30 September 2020, will also get relief under ITEPA 2003 s554Z5 against a future relevant step, although realistically, we wonder how many people will have chosen to do this.
We are aware that it is producing some anomalies with some people who failed to settle because they could not afford advice, and with people who quite reasonably paused the settlement process following HMRC’s letter, both finding themselves now in a worse position than someone who had already settled with HMRC, solely because they did not reach a settlement with HMRC before the 11 March 2020 announcement.
Alice settled with HMRC (pre 11 March 2020). All of the tax and NIC paid was under voluntary restitution. Alice will not have paid income tax on the making of the original loan, under the loan charge or on the subsequent waiving of the loan. There may be an inheritance tax (IHT) charge but that is a separate matter.
Bill’s facts are identical to Alice. However, Bill received a letter from HMRC in autumn 2019 suggesting he could pause his settlement discussions, which he did, pending the outcome of the loan charge review. Bill will not have paid income tax on the making of the original loan or under the loan charge but an ITEPA 2003 Part 7A tax charge will arise as and when, or if, the loan is waived.
Any taxpayers affected should ensure they take advice before any steps are taken relating to the trust or loans.
The professional bodies have voiced concerns to HMRC about this state of affairs which does not seem to meet the objective of the Morse review to draw a fair line under the whole saga.
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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...