Disguised Remuneration: the government responds to the loan charge review

In response to the controversial ‘loan charge’ on loans made to employees by third parties since 1999, in September 2019, the Government commissioned Sir Amyas Morse to lead the Independent Loan Charge Review.

The Government have recently announced their response to the report which takes on board many of the recommendations in the Review.

We welcome these changes, the key ones being:

• the loan charge will apply only to outstanding loans made on, or after, 9 December 2010
• the loan charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, opening an enquiry)
• people can now elect to spread the amount of their outstanding loan balance (as at 5 April 2019, recalculated in line with the above changes) evenly across 3 tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021. This will give greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of tax
• HMRC will refund voluntary payments (known as ‘voluntary restitution’) already made in order to prevent the loan charge arising and included in a settlement agreement reached since March 2016 (when the loan charge was announced) for any tax years where:

1. the loan charge no longer applies (loans made before 9 December 2010)
2. loans were made before 6 April 2016, the avoidance scheme use was fully disclosed to HMRC and the department did not take action (for example, opening an enquiry).

It is important to note that HMRC will not be able to process any refunds until changes to the loan charge legislation have been enacted by Parliament.  The draft legislation and further guidance are expected to be published early in the New Year.  The new rules are not expected to become law until summer 2020.

Action to take now

If the tax due has been settled, or if it has not been settled but the taxpayer could be liable to pay the loan charge, HMRC will write to them in early 2020 to explain what the changes mean for them.

Taxpayers who have not filed their tax return, or agreed a settlement with HMRC, should submit a Self Assessment tax return for the 2018 to 2019 tax year.

There are two ways in which this can be done:

1. submit by 31 January 2020, giving a best estimate of the tax due (as the new rules will not become law until after this point), or
2. file by 30 September 2020.

HMRC have confirmed that they will waive penalties for late filing, late payment and inaccuracies in respect of the loan charge entries in these returns. Late payment interest will not be payable for the period 1 February 2020 to 30 September 2020, provided a return is filed, and tax paid or an arrangement made with HMRC to do so, by 30 September 2020.  Therefore HMRC have effectively extended the filing deadline for those participating in DR loan schemes until 30 September 2020.

Health warning

The rules determining whether the new loan charge will apply, particularly prior to 6 April 2016, can be complex.  Therefore if you are in any doubt you are advised to speak with a professional adviser.

For more information on how Crowe can help, contact Shaun Young.