What is the loan charge?
Coming into force on 5th April 2019, the 2019 loan charge is seen by many as a retrospective tax, intended to tackle ‘disguised remuneration’ loan schemes, although this point is strongly contested by HMRC.
A number of schemes were historically set up where a company entered into a loan with a director or employee with the loan never being repaid. The company and employee would argue that the amount which was received by way of a loan wasn’t remuneration and, as such, that it should not be subject to tax. HMRC, however, disagreed and considered these arrangements to be tax avoidance.
The Loan charge has been introduced by HMRC in order to put this question beyond doubt and to bring such loans into tax. The loan charge legislation will apply income tax to certain loan schemes, both current and historic, and is, again seen by many, as HMRC’s way of recovering unpaid taxes.
As a result, thousands of employees are facing the potential of hefty fines, not necessarily through any fault of their own.
Are you affected?
The loan schemes affect contractors, freelancers, agency workers as well as shareholders who introduced EBT arrangements. In the last few years, legislation has been introduced to prevent such schemes, however some organisations have found loopholes and continued to offer similar schemes.
When it comes into force, the loan charge will apply to loans up to 20 years old and is expected to affect 50,000 to 100,000 people.
The schemes that are under scrutiny and will be affected by the 2019 loan charge are;
- Contractor Loan schemes
- Employee Benefit trusts
- Employer finance retirement benefit schemes
Loan charges are controversial and complex, and HMRC recognise that not everyone entered such schemes willingly, or indeed were fully aware of the repercussions.
It has been announced that, in certain circumstances, individuals who earn less than £50,000 and will struggle to pay the loan charge will be granted a period of respite and will be given up to seven years to pay the charge back in full.
How to get help
There are several options available to anyone involved in a loan scheme, who want to get out. These include;
- To repay the loan
- Pay the loan charge in full
- Settle any income tax owed with HMRC before the charge comes into force on the 5th April
However, just to add further uncertainty in an already complex area, following severe pressure, particularly from the contractor and freelancer community, a cross party group of MPs have forced a review of the impact of the new loan charge, putting forward that its retrospective nature should be reviewed. However, the deadline for the Chancellor to report back to Parliament is not until 30 March 2019. This leaves many taxpayers who need to be able to make a decision on the right course of action before the case is heard.
We recommend you seek professional advice if you are affected by a loan charge or are unsure about its consequences.
If you would like to speak to a dedicated member of our tax team, please do not hesitate to get in touch. We can liaise with HMRC on your behalf and ensure the best outcome possible.