2019 Loan Charge: HMRC answers ContractorUK readers' questions
Here, in a ContractorUK exclusive, HMRC has agreed to tackle 14 gripes about the LC. The 14 were compiled with help from experts and input from the directly affected. And the answers (seven feature in part one /two), are exactly as HMRC gave them.
1. What is the 2019 Loan Charge, in terms of an amount it levies? Or is there an average percentage I can work towards in terms of what I might owe HMRC?
Broadly speaking, the total of your outstanding loans is added to your other taxable income for 2018/19, and tax is calculated based on the total. The rate at which you pay tax will depend on the level of your other income, and the outstanding loan balance.
To estimate how much extra tax you will need to pay under the loan charge:
- Work out the tax due on your expected income for 2018/19, you can use HMRC’s online calculator to do this.
- Add all of your outstanding loans to your expected income, this will be the total income you are taxed on if you haven’t settled and the loan charge arises.
- Work out the tax charge on this total income. Again you can use the online calculator.
- The difference between the two will be a good estimate of the loan charge if you have used accurate figures.
Paying the loan charge does not settle any open enquiries -- those will still have to be resolved.
2. Where the LC applies to the employer, what steps does HMRC take to try to recover the tax from them first? This .Gov page talks vaguely about transfer of liability, but does not go into any great detail on how this is achieved and what steps HMRC needs to take to make it happen. Do contractors just suddenly receive a tax bill on April 5th 2019; surely not?
Pay As You Earn (PAYE) liabilities fall on the employer in the first instance. The charge on loans received through disguised remuneration schemes also follows this principle. HMRC will pursue employers who have used disguised remuneration schemes for the tax that is due, and will only collect this liability from the individual where it cannot reasonably be collected from the employer, for example where the employer is no longer in existence.
Where an employer no longer exists, or is offshore at April 5th 2019, then the charge cannot arise on the employer, and it falls on the individual. This is likely to be the case with the majority of contractor loan schemes. In these situations, the outstanding loans must be included as income in the 2018/19 tax year and the tax will be due by January 31st 2020.
Where any UK-based employer, who still exists, has used a disguised remuneration scheme, but cannot pay their PAYE liability, HMRC will use existing transfer of liability powers to collect the income tax liabilities directly from the individual who received the loans. HMRC will write to individuals who are in scope of such a transfer.
If a settlement has been agreed, and a settlement agreement signed before April 5th 2019, the individual does not need to include in their tax return any outstanding loans which have been included in that settlement. Such loans are not subject to the loan charge.
3. If I repaid the loan to the commercial party I dealt with, would that resolve the matter? And how might I start to do that if that entity is no longer a going concern, but has changed into another business? Is there an HMRC policy for when you want to repay but the lender has (effectively) disappeared?
If the loan was a genuine commercial loan then it would not be caught by the loan charge. If the disguised remuneration loans are repaid, this must be a payment in money where there is a genuine economic consequence to the repayment. If it is a genuine repayment and is not part of an avoidance scheme, then the loan charge will not arise.
This will not necessarily settle any tax liabilities which arose as a result of the original transactions. However, there will be no liability under the loan charge in this situation.
Where the original lender no longer exists, the loan may have been passed or sold to a different entity. Loans can be repaid to the current creditor.
If repayment of the loan is not an option, then settlement is the only way to prevent the loan charge from arising.
4. If I settled with HMRC under the Contractor Loan Settlement Opportunity, is that the end of the matter, or are there any circumstances where I could face the 2019 LC as well? Please outline those circumstances.
The Contractor Loans Settlement Opportunity (CLSO) and the current disguised remuneration settlement terms are two different things.
A settlement under the CLSO covered all years the disguised remuneration scheme(s) in question had been used, unless it was specifically agreed to exclude any years or if there were years that were not included because they had not been disclosed to us. Even if some of the years of scheme usage were closed years, and so no payment was made for those years as part of the settlement, the loan charge will not arise on those years.
If you settle under the current settlement terms (published on November 7th 2017), the double taxation rules mean that, if you have settled in full for all amounts that would be taxed by the loan charge, you will not be caught by it.
However inheritance tax could potentially arise at a later point if the trust, loans or other assets haven’t been dealt with appropriately in line with settlement e.g. if the trust wasn’t closed by the date that any exit charge was calculated to.
HMRC advisers can talk you through your specific circumstances if you come forward and provide them with all of the necessary information.
5. Please cite the names of HMRC documents dated 1999, 2000, 2001 or the immediately subsequent years where HMRC stated the loans to be unlawful. Can HMRC please quote from them, because I’d like to hold my accountant responsible for encouraging my use of a loan scheme around those dates. And what’s HMRC’s position on accountants who strong-armed contractors into a scheme?
HMRC’s position is that these schemes don’t work to produce the intended tax result and has challenged their use from the beginning.
HMRC has opened tens of thousands of enquiries into these schemes starting before 1999, making those using them and their representatives aware of their view that they did not deliver the intended tax consequence. You (the individual), or an agent on your behalf, will have been sent enquiry letter(s) from HMRC to confirm your tax return was under investigation.
HMRC publications have also highlighted that these schemes don’t work. For example, Spotlights 5 and 6, published in 2009 and 2010, highlighted that HMRC considered avoidance schemes using trusts and EFRBS to reward employees were ineffective.
It is not normal, or indeed reasonable, to be paid in loans that are unlikely to be repaid. There are obvious risks in entering into arrangements to receive loans in place of remuneration.
HMRC aren’t able to comment on the advice people have been given in respect of their tax affairs. However, HMRC has a range of powers to tackle those who promote or enable tax avoidance, including imposing penalties of up to £1 million or the whole of the fees earned for attempting to enable avoidance.
HMRC reports promoters to the Advertising Standards Authority and professional bodies, as well as considering criminal investigations, which can lead to convictions and jail terms for those promoting tax avoidance schemes.
6. What sort of detail does HMRC need to see so that I can secure a Time To Pay agreement? How many TTP arrangements does HMRC have in place for 36 months? That’s the only sort of timeline I could consider.
When entering into a contract settlement HMRC will work with you to agree a payment plan that is manageable for you.
For those who settle ahead of the loan charge arising, you can pay the amount due over a period of up to five years, with few detailed questions asked, as long as:
- your expected current year taxable income is less than £50,000 (for employees, this is your expected gross earnings, for self-employed people, this is your expected net profit)
- you’re no longer engaged in tax avoidance
If your income is higher or you need a longer period to pay, HMRC can still help you but would need more detailed financial information from you before agreeing an arrangement.
There are no defined minimum or maximum time periods for payment arrangements.
7. What is the September 30th deadline I keep hearing about? Can I take advantage of this and still ‘keep my options open,’ in that it doesn’t necessarily mean I automatically settle?
HMRC has asked that those who want to settle let us know and provide all of the information required to calculate a settlement, or provide their own calculations, by September 30th 2018. This is to ensure there is enough time to process the settlement before the loan charge comes into effect.
If you haven’t registered and sent HMRC the required information by September 30th, you can still come forward after that date, but it may not be possible to reach a settlement with you ahead of the loan charge arising. The earlier you send HMRC the information the more chance there is of reaching a settlement before the loan charge arises.
Registering your interest in settlement by September 30th (and providing the information) does not commit you to any course of action. If you choose to enter into a contract settlement, that will be legally binding.
If you do not settle before April 5th 2019 then the loan charge will arise and you will be required to pay it if you have outstanding loans from your disguised remuneration scheme. Paying the loan charge won’t bring finality to your tax avoidance use as any HMRC open enquiries will still need to be settled.