It has recently been announced by the Chancellor, Sajid Javid, that the retrospective loan charge by HMRC will be reviewed independently by Sir Amyas Morse, giving hope to those who have been part of disguised remuneration schemes that less punishing rates of interest will be levied. This is concerning to those that have received letters from HMRC and settled their matters by paying a settlement sum to HMRC. It is understood around 2,000 people have already opted to settle with the Revenue for sums of around £1 billion to avoid any further loan charge penalties. It has yet to be clarified whether the loan charge would be cancelled.
What is the Loan Charge review?
The independent review is being conducted by Sir Amyas Morse, the former Comptroller and Auditor General and Chief Executive of the National Audit Office (NAO). The review comes in response to the evidence collected by The All-Party Parliamentary Group on the Loan Charge (APPG). The review will look into the effectiveness of the loan charge.
When will the loan charge review findings be released?
The Government advise that the Terms of Reference specify that the review will report and provide independent recommendations to the government by mid-November. They also specify that, whilst the review is ongoing, the Loan Charge will remain in force, in line with current legislation.
The Government has said that it will consider and respond to the outcome of the Review once it has concluded.
Why is the loan charge so controversial?
The main bone of contention is that the loan charge appears for all intents and purposes to be a retrospective penalty, which constitutionalists argues breaches the rule of law. In particular going against the fundamental Fullerian principles that laws should not be retrospective in their effect i.e. not illegal at the time but subsequently deemed to be so thereby creating uncertainty which is antithetical to the rule of law. In addition, the loan charge has caused significant stress to those effected by it (including one case of suicide).
What are Disguised Remuneration schemes?
Disguised remuneration schemes are schemes that seek to avoid Income Tax and National Insurance contributions by paying users their income in the form of loans that are never repaid. However, as the loans were never intended to be repaid, they do not differ to normal income and are therefore taxable.
The most common forms of disguised remuneration in recent years have been Employee Benefit Trusts and unregulated pension schemes known as Employer Financed Retirement Benefit Schemes, both of which have now been identified by HMRC as Disguised Remuneration Schemes.
What is the Loan Charge?
The 2019 loan charge, which is the charge on outstanding disguised remuneration loans, is a government measure aimed at tackling this type of income tax avoidance. Having previously been announced at Budget 2016 and was introduced in the Finance Act (No 2) 2017, the charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019.
HMRC has issued a briefing encouraging people to come forward and settle their tax affairs before the 2019 loan charge comes into effect on 5 April 2019. This charge will not arise on outstanding loans if the user has agreed or is progressing towards settlement with HMRC before 5 April 2019.
Since the loan charge was announced, HMRC has agreed settlements on disguised remuneration schemes with employers and individuals worth more than £1 billion. Around 85% of this amount was collected from employers, with less than 15% from individuals.
Am I liable for tax under a scheme I entered into?
If the scheme you have entered into falls within the definition of a disguised remuneration scheme, an account of the tax liabilities on this income will have to be made to HMRC.
Payment of any tax owing can be demanded some time after you entered into the scheme together with additional penalties.
HMRC has written to individuals it knows to be involved in disguised remuneration schemes to encourage them to come forward and settle before the loan charge applies. Once HMRC is aware of the disguised remuneration scheme then an Accelerated Payment Notice may be issued for payment. Loan scheme users have a choice to:
- Repay the loans that they took out;
- Settle the tax due; or
- Pay the loan charge on balances that are outstanding in April.
Need Expert Tax Advice?
If you have entered into a disguised remuneration scheme (or any other tax avoidance scheme), it is important you seek legal advice as soon as possible.
Whether you are an employer, employee or contractor, our expert tax solicitors and barristers can assist you in managing HMRC’s investigation and entering into negotiations by providing comprehensive legal advice and robust responses to the investigators. Our tailored team which also comprises of specialist forensic accountants can calculate what you owe and make representations on your behalf to HMRC.
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Our Tax Disputes professionals are available to give information and advice in negotiating penalties and loan charge settlement with HMRC. To contact one of our specialist Tax Lawyers please click here or call 02071830529.