What is a loan charge and when will one apply?
In 2019, the HMRC implemented a loan charge to try and reclaim tax previously hidden in disguised remuneration schemes, dating as far back as 1999.
These may have been perfectly legitimate financial vehicles at the time but are now regarded as tax avoidance schemes by the HMRC. The schemes allowed people to have their income paid in the form of a loan. Typically, a company would use the services of an umbrella company, who would pay the worker in the form of a loan, meaning that Income Tax and National Insurance Contributions were not payable. Instead, the worker would pay interest on the loan.
However, the HMRC said that as the loans were never intended to be paid back, the money people received should be treated as any other income and taxed accordingly.
How much is the loan charge?
The loan charge works by adding together all your outstanding loans and then taxing them as a yearly income. This could mean that you’re likely to pay tax at a higher rate than you would have done at the time you received the loan.
As the total is assessed in one lump sum, it will benefit from only one year of allowances and will be placed in the appropriate tax band despite the fact that it took several years to accrue.
How will HMRC enforce the loan?
HMRC estimate that the loan charge will ultimately accrue around £3.2 billion for the treasury. People who have used the loans can:
HMRC urged people to come forward and settle their tax liabilities before the loan charge came into effect, as it was likely to reduce the overall amount they had to pay.
The amount of outstanding loan must be declared as part of your tax return, with this amount being added to any other income you receive before your tax liabilities are worked out.
HMRC are continually investigating these schemes and individuals who may have used them.
Who is affected by the loan charge?
The loan charge will apply to anyone who entered into a disguised remuneration scheme regardless of their income, employment status, or the job that they do.
If the scheme was set up by an employer, then their employees will not be liable, but HMRC will pursue the employer for payment. If, however, the employer has died or is now domiciled offshore, then HMRC will reserve the right to reclaim the money from employees.
The majority of those who are liable for the charge were working in business services, including professions such as IT consultants, financial advisers and management consultants.
Why the loan charge has been met with some resistance
The announcement of the loan charge in 2016 was greeted by shock and consternation in some quarters. Many people who believed they were being paid in a legitimate way were suddenly faced with the prospect of having to pay hefty bills. Several were faced with poverty and possible bankruptcy, as the amounts they were required to pay ran into the tens of thousands. The push-back led to the government announcing a review of the scheme, with a range of changes announced in December 2019.
These changes reduced the amount of eligible years for loans to be liable for the charge, introduced more generous write-offs for people who have voluntarily informed HMRC about their loans, a greater range of repayment options and refunds if you’ve already made payments on loans taken out for years where liability no longer applies.
Can I appeal against the loan charge?
If you believe a scheme that you were a part of has been falsely designated as a disguised remuneration scheme, then it may be possible to appeal against the charge. You should contact HMRC as soon as possible, as well as seeking legal advice.
Alternatively, if you’re having problems paying your loan charge then it may be possible to negotiate a manageable repayment schedule.
The reality of the loan charge
The loan charge strikes many people as unfair. When people took advantage of these schemes, they were perfectly legal. Closing a tax loophole may be understandable, but retrospectively taxing people who used them has created an intolerable burden for many people who may never have earned large amounts of money.
The December 2019 review reflected these concerns, but still left the charge in place.
At One Click Accountant we can provide advice about the loan charge and your own liability. Contact us today for more information.