What is the 2019 Loan Charge?
The 2019 Loan Charge is a tax charge which was introduced by HMRC in the 2016 Budget to try and recuperate unpaid tax through schemes that involved loans and have now been deemed as tax avoidance.
The tax charge amounts to the value of all disguised remuneration and disguised self-employment profits that have been paid in the form of a loan or other credit in the past and which remain outstanding as of 5th April 2019. It covers all such loans and credit from 6th April 1999 to 5th April 2019.
Who is affected by the 2019 Loan Charge?
The 2019 Loan Charge impacts contractors who have used disguised remuneration schemes since 6th April 1999 and they are being forced to pay back the tax avoided by January 2020. It is estimated that over 50,000 individuals will be affected.
Unfortunately many contractors did not enter into these arrangements knowingly to avoid tax, and some agency workers may have also had little choice to participate in such schemes, if they wanted the work. They may have entered into the scheme based on advice by third parties or were attracted by advertising without realising the implications.
Based on the information available, 65% of those who used disguised remuneration schemes work in the business services sector which includes professions such as management consultants, financial advisers and IT consultants.
What is a loan scheme or disguised remuneration scheme?
A loan scheme or a disguised remuneration scheme involves paying employees via loans instead of normal taxed salaries. Most of these loans were interest-free and non-repayable, and therefore were designed to avoid paying Income Tax and National Insurance contributions on that income.
The most common form of disguised remuneration in recent years is the creation of schemes commonly referred to as Employee Benefit Trusts and Employer Financed Retirement Benefit Schemes, both of which have been identified by HMRC as disguised remuneration schemes.
Promoters of these schemes can sometimes make false claims, such as the arrangements are ‘HMRC-approved’ or they are ‘compliant with the tax rules’. They may try to draw you in by saying that they are ‘tax efficient’ or that you can ‘retain 80-90% of your pay’. Some of them are also promoted through umbrella companies, which appears to add some legitimacy to the process.
How is the 2019 Loan Charge calculated?
The Loan Charge 2019 takes the total balance of all outstanding disguised remuneration loans on 5th April 2019 and treats them as income received on that date or trade profits arising in the tax year 2018/19.
This means that loans outstanding on this date will incur an Income Tax and National Insurance contributions charge as if they were earnings or profits received in the tax year 2018 to 2019.
According to HMRC, to calculate the value of any outstanding disguised remuneration loans, you would need to check:
- payslips or invoices you received for work performed whilst using these arrangements
- any contracts of employment or service contracts you entered into
- loan agreements you signed, or any other documents that were part of the disguised remuneration arrangement, such as letters from your employer
- your bank statements or check with your bank if your loan was paid directly into your bank account - some banks may charge a fee for searching old records
- your P60
- with the people you received the loan from (usually the trustees of a trust), for information about the loans - they have a legal obligation to give you a response within 30 days of you making a written request
If you need further advice or support regarding calculating your loan charge then you can seek advice from your accountant or tax adviser.
What can you do if you’ve used a loan scheme in the past?
If you have used a loan scheme in the past, which generally speaking means you have received a non-repayable loan from an offshore trust, you will be required to make a declaration to HMRC.
HMRC encouraged disguised remuneration scheme users to come forward and provide all the required information to enable them to settle their tax affairs by 5th April 2019. Therefore any scheme user that has already settled their tax affairs does not need to pay the loan charge.
Scheme users who haven’t settled or haven’t reached a settlement agreement with HMRC within the agreed timeframes are now required to report and pay the loan charge.
As specified by the legislation you will be required to provide loan charge information to HMRC between April 6th 2019 and September 30th 2019. You will also need to file a tax return for the year 2018/19 by 31st January 2020.
What Loan Charge information does HMRC require for the declaration?
HMRC will require, among other things, the following loan charge information for the declaration:
- Name, address, telephone number and email address
- The scheme name
- The start and end dates of the schemes you used
- Any HMRC case reference number you have
- Your Disclosure of Tax Avoidance Scheme number, if you have one
- The total loan amount in each tax year, including any amounts repaid or written off
- Any amounts of tax or National Insurance contributions you have already settled
If you do not report details of your outstanding disguised remuneration loan to HMRC before 1st October 2019, or the information is not complete and correct, you may also be liable to penalties.
This starts with an initial penalty of £300, and further daily penalties of up to £60 a day for as long as the information remains outstanding, up to a maximum of 90 days.
You may also receive a penalty not exceeding £3,000 for each inaccuracy deliberately or carelessly included within the information provided, or discovered after the information has been submitted and you do not tell HMRC.
What if I can’t pay the 2019 Loan Charge?
If you think you will have difficulty paying the loan charge you should seek professional advice as soon as possible from a tax expert or accountant.
Unfortunately this issue cannot be ignored and if you do nothing at this stage you only remain unprotected from this charge.
As mentioned you could also end up accruing additional fees from mounting penalties should you miss the deadline to make your declaration by the end of September 2019.
HMRC state on their website that they can help those who may have difficulty paying what they owe: “HMRC can help those who are genuinely unable to make a full payment of tax owed on time. We can agree payments by instalments and will carefully consider an individual’s ability to pay on a case-by-case basis. There is no maximum limit on how long someone can be given to pay what they owe, and this will be based on our assessment of income and expenditure.”
Seeking advice at earliest opportunity will help you to understand the options available to you, ensure any implications are properly considered, and to help find the best way forward to achieve a sensible outcome, for both HMRC and the taxpayer.
In addition to professional advice, you can also find some useful guidance and support from fellow contractors as well as experts on the ContractorUK forum.