Ignorance for Loan Charge contractors isn’t bliss, eight times over, as tax year-end looms
It might be only the beginning of March -- therefore more than a whole month away from year-end, but contractors are already receiving messages from tax advisers about making the most of reliefs available and, amid a cost of living crisis, such reliefs from HMRC are no doubt selling fast.
Time for vigilance (if not action)
But there are also a number of historic albeit more pressing tax matters that contractors subject to an outstanding HMRC enquiry, or who were involved in a contractor loan arrangement, must keep an eye on, writes Graham Webber, director of tax at WTT Group.
HMRC requested information in 2019 to enable it to apply the Loan Charge. This was backed up by an obligation linked to the 2018/19 tax return, although contractors could delay submission to September 2020. The expectation was that HMRC would begin issuing assessments soon after that.
Do Not Ignore: 1/8
Should you receive a loan charge assessment and believe you should not have to pay it, do not ignore the document. Instead, show the assessment to your adviser and understand your options. But be aware because in our view, these options are now down to just two. You can either pay the loan charge or you can appeal the assessment, meaning you ought to prepare for the inevitable litigation.
Given the numbers of likely loan charge assessments, if you chose to appeal, being part of a group is a better (and less expensive) option.
HMRC’s assumed liability can be challenged
For those contractors who are yet to file a 2018/19 tax return, HMRC has been active in issuing determinations. These calculate an assumed liability and so they can be challenged -- but only by filing the 18/19 return. Consider, HMRC can (and will) take action to recover the alleged tax due and completing the return is the only play here; ignoring it is no defence.
Elsewhere, the Revenue has been on the attack. In particular, a number of arrangements in and around the run up to the loan charge’s imposition promised contractors that the inequitable tax could be removed, if only contractors followed certain steps associated with the loan, before April 5th 2019 -- and paid the fee. Well, on the front-foot here, HMRC has been very clear that in its opinion, none of the arrangements work. Almost on cue, our advisory is now seeing a series of statutory demands for information appearing on these arrangements. Please note contractors, these cannot be ignored unless you wish to risk a penalty.
Adviser selection, APNs, Asking for TTP
If you used such a plan and now have an HMRC enquiry, you must deal with it. If you have a tax adviser who is (or was) connected with such an arrangement, consider carefully whether that adviser is best-placed to deal with the HMRC enquiry. Yes, they may know more about the detail of the plan, but given that the loan charge is primarily a tax on the employer – are they the employer, or are they connected with the employer? If the latter, would that not conflict them? Think hard. Again though, feigning ignorance of the position won’t help.
Of late, there has been some activity around the latest Accelerated Payment Notices that were issued by HMRC, but which stalled when legal challenges were raised. Those challenges are now over, and HMRC has notified those affected that collection will begin shortly.
The APN regime is a powerful tool wielded by HMRC and was designed to not allow appeals. In that objective, it has been a ‘success.’ If you now have a notice from HMRC that an APN is due, your options are again limited. You can pay the notice as soon as possible or you can contact HMRC and ask for a Time To Pay (TTP) arrangement. There is little consistency in TTPs, but you will invariably need to share personal financial information with HMRC. The best advice we can give here is that if you think you will need Time To Pay, get discussions started immediately. Ignoring your need for a payment plan is unwise.
However, if you think that the APN is based on inaccurate loan values, late representations can be made and HMRC has discretion over whether to accept them.
Where we believe HMRC is and isn’t correct
Meantime, the tax authority did issue enquiry notices (Section 9a TMA 1970) in respect of tax year 2018/19, to any individual who the Revenue thought should be declaring the loan charge. Those should have been sent within 12 months of the date the return was filed. HMRC argues that because of the Morse Review (December 2019), they actually have until September 2021 to issue such notices. That may be a correct interpretation from HMRC where the return was submitted after the statutory deadline, but not where it was submitted by January 31st 2020. Right now, though, we are seeing HMRC issue “compliance checks” seeking information to which, strictly-speaking, they are not entitled. The purpose is no doubt to allow department to raise a discovery assessment, which is a tax charge raised outside the usual time limits.
If you have a notice from HMRC asking for information relating to 2018/19 and it’s dated after January 2021, you cannot ignore it. Instead, you should get it checked to ensure that it was issued with the appropriate time limits.
Further HMRC notices now circulating...
At the same time, we are also seeing HMRC issue Section 9a notices for 2019/20, on the basis that an election made in 2018/19 to spread the loan charge over three years should have led to an entry appearing in the 2019/20 tax return. If you’re a contractor who did make such an election, and have forgotten to make the entry in 2019/20, you should do so as soon as possible. Where the election was made in error, then resolution is possible and the accountant who filed your return for 19/20 will be able to assist here. Ignoring the HMRC notice? Again, obviously that would be ill-advised.
In addition though, HMRC is issuing what are called Section 684(7A) ITEPA 2003 notices despite their discretion to do so being the subject of at least two current court cases. These allege to be notices that turn off – retrospectively – an employer’s obligation to make PAYE deductions from payments made to individuals. They are controversial given that (for the moment at least) they cannot be appealed. Instead, a Judicial Review is the route to challenge, and that has to be started within three months of the notice arriving. If you are unfortunate enough to receive such a notice, don’t ignore it but share it with your tax adviser as quickly as possible.
In more positive action from HMRC, our advisory is meanwhile seeing Schedule 36 enquiry notices issued for information relating to scheme usage in the current tax year -- 2021/22. Clearly, proactive enquiries of this type are welcome for protecting contractors from falling, inadvertently, into tax avoidance schemes. The tone of the notice is regrettable and suggests deliberate wrongdoing, however.
Schedule 36 notice, '17/18 Discovery Assessment? Ignore neither
Be aware, these notices can bring penalties for not responding. While a response is necessary (meaning ignoring such a notice is not an option), it’s also an opportunity to question HMRC’s strategy and ask for examples if HMRC is pursuing the umbrella, promoter and/or agency.
Lastly, over the next few weeks HMRC will be issuing discovery assessments for 2017/18. There were a number of schemes in this period that might attract an assessment. If you have one, you will need to consider whether an appeal is appropriate and if so what the grounds of that will be. That appeal should of course be backed up with a strategy to resolve the issue at tribunal. No room for ignorance here either then.
If you have a question about contracting please feel free to ask us!