Initially introduced on 5th April 2019, the 2019 loan charge was intended to tackle ‘disguised remuneration’ loan schemes, whereby a company entered into a loan with a director or employee and the loan was never repaid, arguing the loan was not a form of remuneration and therefore not subject to tax.
Considered to be tax avoidance arrangements, HMRC introduced loan charges, making current and historical loans subject to tax. The policy affected thousands of contractors, freelancers and agency workers, who were paid in the form of non-taxable loans, typically issued by third-party employee benefit trusts (EBTs).
However, almost a year after its implementation and following an independent review which sought to determine whether terms of the charge are proportionate and justified, HMRC was heavily criticised for it’s unrealistic repayment terms and hefty fines, and was presented with a series of recommendations about how the legislation should be amended.
HMRC have confirmed they will accept the recommendations and have formally announced several changes that will be made to the loan charge policy. In summary, the proposed changes include:
- Reduce the amount of time the policy covers, from 20 years to 10 years
- Provide the option for the loan balance due to be split evenly over three consecutive years to make the charge more affordable
- In the instance where the scheme was fully disclosed (before 6 April 2016) but HMRC failed to make enquiries, the charge should not be applicable, but any after this date should remain within the scope of the Loan Charge
It’s important to note we are still awaiting more detailed guidance, and this information is purely indicative of the changes set to be made, hence why we recommend a cautious approach until comprehensive legislation is published.
If you have any concerns or questions regarding the loan charge, please rest assured that we will be conducting a thorough review of our records to identify any clients who may be liable for a refund since the Loan Charge was initially implemented in April 2019.
In the interim, please do not hesitate to get in touch with a dedicated member of our tax team in the interim.