Loan Charge 2019 deadlines loom large, for contractors – and HMRC
As we inch ever closer to October 1st 2019, the HMRC 'Nudge' unit is in overdrive, relaying the key dates by which those affected by the Loan Charge legislation must act, while the department’s under-resourced settlements team grinds to a halt.
The juxtaposition between the two is causing considerable confusion among the contracting community so let’s attempt to bring some clarity, writes Rhys Thomas, managing director of HMRC dispute and loan charge advisory WTT Consulting.
The cynical among us might suggest this is deliberate on HMRC’s part. A more practical view is that this is another instance of HMRC’s failure to predict the consequences of their own (in)actions. Either way, some clarity must indeed be injected into this opaque position.
Below, we seek to rationalise the position and highlight the issues faced by contractors over the coming months.
The key dates by which HMRC wants contractors to act are the following three:
August 31st -- Voluntary settlement must be finalised
September 30th -- Loans affected by the loan charge must be disclosed via the online portal
January 31st 2020 -- Loans affected by the loan charge must be disclosed as part of the return
Taking each one of these in isolation allows us to identify the key issues:
Voluntary Settlement Window
A brief history of previous settlement opportunities permits an understanding of the issues faced now.
Beginning in July 2014, HMRC issued terms by which those who had participated in a loan-based contractor arrangement could settle. A deadline of January 9th 2015 was set, but this was ill-conveyed and many contractors remain unaware of this earlier opportunity. New settlement terms were issued in November 2017. A deadline of May 31st 2018 was given to register an interest with all relevant information to be with HMRC by September 30th 2018. The aim was for a settlement to be agreed before the Loan Charge took effect, giving HMRC just under a year to agree settlement calculations.
In the subsequent nine months, what began as a strict timeframe has descended into farce. The vast majority of calculations have yet to be delivered by HMRC; next to no acceptances have been sent and HMRC is still accepting requests for settlement 400 days after their original deadline. With just one month and 27 days left until another deadline, what can HMRC achieve that it hasn’t been able to in the past nine months? Even more worryingly, all settlement calculations carry a standard 30-day window within which to respond to HMRC, leaving the Revenue just 27 days to turn around approximately 25,000 settlements. In short HMRC cannot cope.
In theory, this can simply be cured by HMRC extending its own deadlines in much the same way it has resorted to in the past, but this time the terrain is different.
This time, HMRC knows that unless settlement is agreed by September 30th, the loan charge legislation will kick in.
Duty to provide Loan Charge information by September 30th 2019
Part 35A, Schedule 1 FA 2018 states that where “a person agrees, with an officer of Revenue and Customs, terms for the discharge of liability for income tax” the requirement to disclose as part of the Loan Charge is removed. In short, if settlement is agreed, there is no loan charge.
So, what constitutes agreement?
The lucky few who have received their settlement calculations from HMRC, generally assume that by signing and returning the contract, settlement has been reached. The September 30th deadline no longer applies. This is not accurate. In order to finalise, the contract acceptance by HMRC must be received and until that event settlement can be withdrawn at any time, by either party.
As above, the current HMRC workload equates to sending 25,000 settlement calculations, then (assuming the calculations are correct which is grossly unrealistic) waiting 30 days for the taxpayer to respond and then dispatching 25,000 acceptance letters within 88 days. By way of illustration, one of our clients has already been waiting four-and-a-half months for a letter of acceptance.
Realistically, HMRC is simply not going to reach this deadline.
So, the important question is what happens then?
Clearly, direction from HMRC should be observed here. For this we turn to Ruth Stanier’s (HMRC director-general of customer strategy and tax design) letter to Sir Edward Davey MP in March of this year, where she stated:
“As set out by HMT and HMRC officials in discussion with you on 28 February, scheme users who come forward with a genuine intention to settle before the 5 April 2019 will not be disadvantaged and can still benefit from the opportunity to settle under the published terms.”
From this we can assume that come September 30th, those who have registered an interest in settlement and not received calculations will not need to make a disclosure, nor will they face any associated penalties. However, Ms Stanier goes on to explain:
“Settlements must then be reached by 31 August 2019, or the loan charge will apply.”
Again, we are left with confusion at the hands of an aggressive HMRC which simply cannot offer clarity to those affected, their advisers or those MPs that courageously stand up for them.
As you might expect, we have sought clarity from senior HMRC officials many times since March. We await a substantive response.
Aside from the glaringly obvious issue(s) that the situation raises, there are further layers of complexity around the Loan Charge itself. If we assume that the charge was intended to be a lever to persuade taxpayers to settle, even on terms based on HMRC’s internal opinion, then clarity is essential. Instead we have a scenario which has had no external oversight; no legislative grounds and no explanation of policy (other than contradictory statements made to MPs). There is the deliberate conflation of claiming that the employee is liable for a tax which falls due on the employer, (true for the loan charge, false for PAYE).
If we are to assume that in absence of further clarification from HMRC, a disclosure should occur despite a pending settlement, then contractors would now be required to get the loan information from trustees. It is likely that these trustees will charge for this or no longer exist or will refuse to acknowledge their involvement. Even where trustees are willing to help, they must speak to their bank in the vain hope that they will be able to recover statements from 20 years ago when previously, based on reliance of HMRC’s assertion that the loan charge would not apply they would not have had to. Nor are they duty bound to retain information for more than seven years on the basis HMRC never raised an enquiry or communicated any concerns around the use of the arrangements.
Similarly, the sterling work of the Loan Charge Action Group, the Loan Charge APPG, their members, and of course those that support these causes has resulted in support from 200 MPs, including more recently Conservative leadership candidates Boris Johnson and Jeremy Hunt, notably for a review of the Loan Charge legislation. Contractors are therefore justified in listening to those who run our country make these suggestions, and are understandably holding out hope that it will be followed through and that disclosure will not be needed.
We would not advise non-disclosure where you are legally required to and its certainly the case that our clients will be advised to disclose in a specified manner that aligns with our strategy. However, it is reasonable for an unrepresented taxpayer to think that until all of this is cleared up, they have no duty to disclose.
It is also reasonable to consider that a court may support that decision.
What should happen next and what should Loan Charge contractors do?
Firstly, for the reasons above and many, many more, we join those who are calling for a stay in the execution of the loan charge.
The confusion created by HMRC’s failings will result in inaccurate disclosures, that in turn will see HMRC tied up in double the amount of enquiries they sought to finalise by implementing the Loan Charge in the first place.
For contractors, if you have not reached a settlement by September 30th, you have a decision to make. Firstly, you must decide if any loans you have received are caught by the legislation. Considerations around this will involve where the money received came from, whether it came from a third-party, whether it was onshore or offshore, how the payment was characterised, whether the loan is outstanding and if not, how it was paid off. It is suggested that due to the severity of the situation professional advice should be sought. Each adviser will have their own strategy and research, so be sure to speak with more than one and understand each method.
From there, it is hoped that you will be able to make a decision on whether or not and if so, how a disclosure should be made.
At the same time, we would encourage you to join the relevant groups acting tirelessly to gain clarity through government and HMRC. And finally, do visit your own MP to ask them to support both the pause in Loan Charge for the reasons above, and the Loan Charge APPG report. You ideally want to be given the opportunity to settle as per your wishes.
We will update ContractorUK readers again, nearer both the August 31st and the September 30th deadlines, to spell out any changes and report on any progress made. But in the meantime, it is more important than ever that HMRC and the government take a hard look at the long term-effects of their mis-management, while contractors also do some reflection – to understanding their position, their options and how they go about asserting and forcing those in power to observe their basic right to tax certainty.