Today’s September 30 Loan Charge deadline: the end for contractors, or just the very beginning?
For many a Loan Charge contractor, Wednesday September 30th -- today -- is the end of the beginning. Or asks Graham Webber, tax director at WTT Consulting, is it actually only the beginning of the end?
What is indisputable is that the end of September 2020 brings about a sea change in how contractors will be able to deal with HMRC enquiries into historical enquiries.
It's all change (cont.)
Until now, HMRC has had to rely upon a process of identifying users of contractor loan “schemes” and go through a statutory process of raising a section 9a (TMA 1970) enquiry. Or, failing that, use their powers under the “discovery” rules to begin an assessment. The 30th of September, however, brings into force the much-delayed, much-changed, infamous ‘Loan Charge.’
In theory at least, contractors with loans remaining from historic schemes are required by HMRC to disclose the outstanding balances and pay the tax. This is tax calculated by adding all outstanding balances to 2018/19 income and assessing the tax. An alternative is to declare one third of the loans in 2018/19 and a further third in each of the next two tax years. Either way, the cost is significant.
It is possible to set against that loan charge liability amounts paid under an APN (Accelerated Payment Notice) – for the same years as included in the loan charge, but at a cost of rendering the amount paid non-refundable. Indeed, overpay the loan charge and the HMRC rules say that you’ll not get any of that money back. It’s not a feature that is common in taxation – indeed, I’ve never seen it before – and perhaps it’s more akin to a fine or a penalty.
Challenges, consequences, chasing
Meanwhile, seemingly gaining momentum, are a number of legal actions in train seeking to limit or abolish the Loan Charge. One of those actions appears to be focussing on whether the UK’s 2019 Loan Charge is compatible with EU law. From what I understand of it, this is a challenge with a real prospect of success. But even if successful and the loan charge then disappears, does this help? If you have no historic enquiries, yes it does. If you have enquiries that remain to be concluded, then no -- they still have to be settled at some point. That requires attention to the years in which payments were received.
Crucially, those HMRC enquires will continue regardless of the fate of the loan charge. There has been much (hopeful) discussion that HMRC, once in possession of the money, will no longer bother chasing reluctant taxpayers over alleged debts that may by now be approaching almost 20-years-old. That is not an option. There is no law that permits that to happen. HMRC is obliged to continue the chase to find the correct amount of tax – and those in HMRC we speak with, say that this extended pursuit will happen.
Our already overwhelmed taxman faces no let-up
Back to the here and now. The presence of today’s September 30th loan charge deadline has created the usual last-minute rush to comply – or prepare for non-compliance. We (and no doubt many other advisers) are at full capacity and rushing to push and persuade a reluctant and frankly overwhelmed HMRC, into delivering on their multiple promises over the past year or so. Once the deadline passes however, it will be a time to pause and consider the challenges ahead.
Related to that, we are seeing new owners of alleged loans. Whatever the motives of such parties, legal obligations have to be met – or challenged. We see HMRC preparing for the next hearing on Hoey, which is due in the Upper Tier Tribunal around October 20th. The decision there will be a key one. We see more litigation being brought (we have at least three of our own), and this will begin a long series of cases touching upon many general and specific aspects of schemes and how tax law is to be interpreted.
Sadly, we also see new schemes being promoted and despite fine words and soapbox promises from the hierarchy at HMRC, there continue to be no real restrictions on the promoters – many of whom are familiar names from the past.
Avoid the avoiders (and your old ways)
There is a simple message here. If you are being offered a ‘take-home’ of more than an equivalent PAYE salary, it is a tax avoidance scheme, and eventually you will be invited, via a buff envelope, to discuss that with HMRC. Plain and simple – AVOID, and don’t use them.
A little further ahead we see private sector IR35 reform. Delayed but just as transformational. The new rules will shake up the market like never before and we will see new models as the risks are reassessed and some parties will be unwilling – or unable – to contemplate them. We will see new structures and new contracts and eventually, a new market. Adapt and survive. But hold on to the old ways and you will struggle.
As most contractors will have now noticed, there is no formal Autumn Budget from the government this year, courtesy of the invisible coronavirus. But we may well see changes and tweaks to tax. We have a range of fora now, where tax principles can be discussed and perhaps presented in a manner designed to influence tribunals and beyond. We will probably see GAAR opinions coming to tribunal and the clash between informal panel and statutory judge-led tribunal will be fascinating.
It's all about your next six months
But back to this very seminal moment. Once October arrives – that’s tomorrow, take a deep breath and then pay attention to the next six months because these incoming 26-plus weeks will shape your future, both as a contractor and as an HMRC customer.
If there is one lesson from today’s hard deadline, it is this -- DON’T WAIT. If you have been offered a contract, take steps now to make sure it fits you and that you understand the consequences.