The loan charge was brought in to tax outstanding loans held with EBTs, EFRBS and similar schemes. It was highly controversial as it allowed HMRC to go back up to 20 years, even where original enquiries had been closed without assessments being raised. In addition to this, loans were put into a single charge that applied on the 5th April 2019, increasing the chance of higher tax rates applying, despite the fact that the original loans could have been a collection of much smaller amounts taken out over a number of years.
Following a review, the Government agreed that the loan charge would be withdrawn for all loans taken out before 9th December 2010, the date ‘disguised remuneration’ rules were introduced. In some cases, loans taken out between 9th December 2010 and 5th April 2016 were also exempt, but only if fully disclosed.
Further implications and potential actions required by 30 September 2020
This change in legislation has given rise to some wider implications for some taxpayers:
1. Refund of voluntary restitution settlements
The Government recognises that there will be some taxpayers who upon being faced with a potential loan charge, agreed to settle with HMRC. In some cases, settlements were agreed voluntarily for tax years that were otherwise ‘unprotected’. As a result of the review, the Government will automatically refund any element of a settlement that was made voluntarily between the 16th March 2016 and the 11th March 2020 where the loan charge would not apply.
Affected taxpayers will receive a letter by the 30th September 2020. It’s advised that any individual who settled between these dates to check with HMRC in case of oversight. Refunds can be claimed up to the 30th September 2021.
2. ‘Final’ settlement opportunity
For taxpayers who had registered an interest in settling with HMRC but did not reach agreement, HMRC has said it will make a ‘final settlement offer’ and invite settlement by the 30th September 2020. However, updated guidance suggests that HMRC is standing by previous settlement terms.
Many taxpayers are still willing to settle with HMRC in order to draw a line under enquiries, however, the withdrawal of the loan charge may offer very limited incentives to do so when faced with settlement offers that are designed to be punitive.
3. Loan charge reporting and spreading election
Taxpayers who are still within the loan charge had two options; to submit their 18/19 returns by the 31st January 2020, giving a best estimate of the tax due, or file by the 30th September 2020. HMRC will waive any penalties for late filing and late payment providing the return is filed by the 30th September 2020. Late payment interest will not be payable for the period 1st February 2020 to the 30th September 2020, assuming an accurate return is filed and tax paid, or an arrangement made with HMRC by the 30th September 2020.
You can spread the loan balance over three tax years, this being 18/19, 19/20 and 20/21. To do this individuals must complete and submit a loan charge reporting form before the 30th September 2020.
If you are affected by any of the above changes, or would like to discuss any other issues relating to EBT/EFRBS schemes please contact our tax team on 0161 832 6221.