Loan Charge - a beginners guide

[webberg]

I've had a discussion with my team and we offer the following view.

Assumptions:

Loan made in 2010/11. Year is open and scheme was DOTAS'd. APN issued and paid in the sum of £12,000.

Loan charge assessment is issued in late 2019 showing a liability of £5,000 after allowing for pension contributions etc.

The £5,000 is due 31st Janaury 2020. However, an application for a credit for the APN amount can be made and the loan charge will be "paid" by applying that APN value, partly.

In the event that the enquiry is subsequently (after 31/1/20) finished and the liability in 2010/11 is agreed (however reluctantly) to be £12,000.

The APN amount used to cover the loan charge is withdrawn and reapplied against 10/11.

The loan charge is reduced to NIL, as the loan has been subject to tax in a previous year.

So the net result is that £12,000 is paid, albeit after some shuffling.

In the event that the final position for 10/11 is NIL liability (for whatever reason) then £7,000 is repaid and £5,000 used to pay the loan charge remains due.

You would then have to take separate action - probably JR - to try and recover the £5,000.

I accept that the above is a guess to a degree but is what we think right now.

[Iliketax]

I've had a discussion with my team and we offer the following view.

Big picture wise, I agree but I have some comments on the details. Things will get way more confusing if your employer is still around (e.g. your own limited company). But that may be relevant to only a few people on here so I won't comment on that.

Loan charge assessment is issued in late 2019 showing a liability of £5,000 after allowing for pension contributions etc.

I think that it is very unlikely HMRC will be issuing any assessments as it is self-assessment, you have to decide on your own tax liability.

It's also an interesting question as what you would do if the extra tax (e.g. on top of any PAYE / dividend tax) due was £5,500 because of £500 of pensions tax relief for personal contributions. Would you try to use £5,500 of the APN? I don't know whether HMRC would agree to that or what could be done to achieve that (e.g. a subsequent amendment to the tax return to claim the pensions tax relief).

However, an application for a credit for the APN amount can be made and the loan charge will be "paid" by applying that APN value, partly.

Technically, HMRC must approve this. I've not talked to HMRC about this but for me the approval process is just to check the facts and record what has been done. I don't think it is a subjective process. And there is no form for doing this yet. If you don't get approval before 31 January 2020 then you are on a bit of a sticky wicket as you can't use the APN amount against the loan charge. So you'd probably want to leave a bit of time to get approval.

In the event that the enquiry is subsequently (after 31/1/20) finished and the liability in 2010/11 is agreed (however reluctantly) to be £12,000.

The APN amount used to cover the loan charge is withdrawn and reapplied against 10/11.

The loan charge is reduced to NIL, as the loan has been subject to tax in a previous year.

Big picture, I agree. But it's actually the other way around. The loan charge tax has already been paid and the £5,000 of 2018/19 tax in your numbers stays paid. However, this £5,000 also reduces the 2010/11 liability by the same amount. This is s554Z11C(6) (or s554Z11C(10) if there was more than one loan). The balance of the APN then pays the remaining 2010/11 tax. And you would then have to pay the interest on any late 2010/11 tax too (out of the APN if there is enough left or separately).

[webberg]

My thanks to "Iliketax".

I would agree with pretty much all his comments (or at least I'm close enough to them to not say differently).

The fact that we are both uncertain on exactly how the process will work (approval for APN set off, self assessment or statement) shows that despite many claims to the contrary from HMRC, there is a lot of confusion remaining in the process.

My example was therefore designed to be simple enough to understand easily and did not contain all of the technical elements that bring uncertainty.

[nate922]

Thanks to webberg and Iliketax for the detailed explainations.

The issue here lies in the "application for a credit for the APN" process - Which I couldn't find any information/guidance from HMRC.
Any pointers to where this is published? Could they say no or remove the option to for the APN credit?

[Iliketax]

The issue here lies in the "application for a credit for the APN" process - Which I couldn't find any information/guidance from HMRC.
Any pointers to where this is published? Could they say no or remove the option to for the APN credit?

There is a tiny bit of guidance here: EIM46090 - Employment Income Manual - HMRC internal manual - GOV.UK, EIM46095 - Employment Income Manual - HMRC internal manual - GOV.UK and Tackling disguised remuneration: draft guidance for changes to Part 7A - GOV.UK

This process is specifically set out in legislation and so HMRC cannot unilaterally get rid of it. You can find it here Finance Act 2017 by scrolling down to 554Z11E.

While it does need to be approved by HMRC, I would expect that this is a mechanical process to make sure the APN has been paid and not repaid, the calculation is right and so on. It won't be a subjective one.

[nate922]

Thanks Iliketax. Your posts are incredibly helpful.

[Chloe]

Unfortunately not.

If you think you have been misled or deceived, then you remedy is via the legal system and not the tax system.

There is no benchmarking of your situation to a big business. HMRC claim to be fair to all but in reality, you are right in that you have fewer resources to fight injustice.

Hi, thanks for your helpful post. ...Is Glen May’s “overdrawn capital” account / profit share arrangement classed as loans? The paperwork Glen May have prepared in the past disputes this. I too was misled. Thanks Nicola

[dmuk]

Confused?

Apologies if this has been covered however having trouble keeping up with all the threads and interpretations.

A couple of questions:

1) How do I find out the current outstanding loan balances?

The last correspondence I had with the scheme provider was years ago and unsure they are even in operation.

If I can locate a contact point, are they under any obligation to disclose anything to me?

2) One email I have contains loan balances for two tax periods and then zero. How do I interpret this?

Is the loan still open or closed? The values align to what was reported in my tax returns for the same tax periods.

Are these the values by tax period I need to record with HMRC?

3) It appears that all information on loans needs to be disclosed regardless of open enquiry or not?

So while an enquiry may be in Year 2, you need to disclose Year 1 balances?

4) The HMRC blank spreadsheet is asking for a lot of information. Don't they already have this?

If you withhold income and expenditure details, this excludes you from extending out the settlement terms?

5) What is the current processing time from sending spreadsheet back to HMRC to getting settlement terms from them? Is there a deadline?

Is this required by April 2019 or do you have until January 2020 to submit your 18/19 tax return?

6) Interpretation of the calculations:

"You add the outstanding loan/credit value to your other income in 2018/19 and calculate the total tax due. Deduct tax already paid. The difference is (mainly) the loan charge on unpaid balances."

Year 1: Balance GBP10,000
Year 2: Balance GBP15,000

Therefore you would include GBP15,000 to the asses-able income portion of your 2018/19 tax return?

This is different to settling with HMRC and they throw interest and penalties on top of quasi tax liability in their settlement terms?

7) Forgot to add that if the loan is still open you also need to pay the scheme the outstanding amount of have them write off the debt? Again, another discussion with the scheme (if they exist)?

[webberg]

Apologies if this has been covered however having trouble keeping up with all the threads and interpretations.

A couple of questions:

1) How do I find out the current outstanding loan balances?

The last correspondence I had with the scheme provider was years ago and unsure they are even in operation. [check bank statements from the time. If the loan was a trust or was transferred to a trust, then that will exist and can be tracked down. if you have neither route open, prepare an estimated calculation based on day rate, days worked, etc. Many schemes were predictable in terms of salary/loan ratio and that may help]

If I can locate a contact point, are they under any obligation to disclose anything to me? [The requirement is that you advise the employer of the outstanding loans and the employer advises HMRC. Where the employer no longer exists then you have an obligation to tell HMRC the loan balances on or before 30th September 2019]

2) One email I have contains loan balances for two tax periods and then zero. How do I interpret this? [without seeing it, I have absolutely no idea]

Is the loan still open or closed? The values align to what was reported in my tax returns for the same tax periods. [Loans are not "open" or "closed". Those are terms used to describe whether HMRC has an open enquiry running or whether the year is closed to further enquiry. Nothing to do with loans. IF you drew a loan and have not repaid it, in money, chances are that it exists and you could become obligated to repay it at some time. That repayment obligation is itself not without options and complications.]

Are these the values by tax period I need to record with HMRC?

3) It appears that all information on loans needs to be disclosed regardless of open enquiry or not? [Correct]

So while an enquiry may be in Year 2, you need to disclose Year 1 balances?

4) The HMRC blank spreadsheet is asking for a lot of information. Don't they already have this? [They may do but they are asking you. You can choose not to respond in which case HMRC will use estimates.]

If you withhold income and expenditure details, this excludes you from extending out the settlement terms? [No, but it risks the settlement being later declared invalid and HMRC revisiting the situation but now with a much better case for applying penalties as you will have been dishonest.]

5) What is the current processing time from sending spreadsheet back to HMRC to getting settlement terms from them? Is there a deadline?

Is this required by April 2019 or do you have until January 2020 to submit your 18/19 tax return?

[You need to settle before 5th April 2019 to be sure of avoiding the loan charge. There are noises about this being extended, but we have seen nothing official. You are obliged to tell HMRC about loan balances no later than 30th September 2019. The January date is irrelevant]

6) Interpretation of the calculations:

"You add the outstanding loan/credit value to your other income in 2018/19 and calculate the total tax due. Deduct tax already paid. The difference is (mainly) the loan charge on unpaid balances."

Year 1: Balance GBP10,000
Year 2: Balance GBP15,000

Therefore you would include GBP15,000 to the asses-able income portion of your 2018/19 tax return?

[No - you add £25,000]

This is different to settling with HMRC and they throw interest and penalties on top of quasi tax liability in their settlement terms? [Don't understand this question. If you settle there are no penalties. It is not "quasi tax", it is tax. Interest will apply to tax due but paid late.]

7) Forgot to add that if the loan is still open you also need to pay the scheme the outstanding amount of have them write off the debt? Again, another discussion with the scheme (if they exist)?[you have confused yourself and loans are not "open". Also if the loan is written off, what is there to repay? You may need to repay the loans and many scheme operators are chancing their arm and asking for this. Whether they are repayable or not is a legal question, not a tax one. We believe that in many instances repayment is inappropriate.]

Without being unkind, you are confusing a number of issues.

I suggest that you call an adviser.

We (WTT) offer a free initial call. I believe that Phil at DSW does as well. Other firms, I have no idea.

[Iliketax]

You need to settle before 5th April 2019 to be sure of avoiding the loan charge. There are noises about this being extended, but we have seen nothing official. You are obliged to tell HMRC about loan balances no later than 30th September 2019. The January date is irrelevant

There are some new bits here: Disguised remuneration: settling your tax affairs - GOV.UK These basically say you need to give information by 5 April 2019, not give the information and settle.

If you want to settle your use of a disguised remuneration tax avoidance scheme so that you do not have to pay the loan charge, you should contact us now and send us all the information we need as quickly as possible, and by 5 April 2019 at the latest.

....

If the loan charge will apply and you want to settle your use of these schemes before it comes into effect, we have made the arrangements easier for those earning less than £30,000 and £50,000. You can pay the amount due over a period of up to 7 years, without needing to give any detailed financial information, where:

- for payment arrangements of up to 7 years, your expected current year taxable income is less than £30,000 (for employees, this is your expected gross earnings, for self-employed people, this is your expected net profit)
- for payment arrangements of up to 5 years, your expected current year taxable income is less than £50,000
- you’re no longer engaged in tax avoidance
- you settle your disguised remuneration tax affairs or give the information needed to do so before 5 April 2019