With the Finance (no. 2) Act 2017, HMRC is tightening the loop on DR tax avoidance schemes and attempting to recoup lost tax with something called the 2019 Loan Charge.
This is a retrospective Charge applying back to 1999, so it has the potential to affect businesses of all sizes, freelancers, agents and workers – even those who have been retired for over a decade. In this article, we’ll address three burning questions about the Charge to get you informed. Read on for expert industry analysis.
What is the 2019 Loan Charge?
The 2019 Loan Charge gives HMRC power to issue a tax charge on outstanding loans that are part of a disguised remuneration tax avoidance scheme (DR scheme). The Charge applies to any such loan taken out after 6 April 1999.
A tax charge will be presented where you have an outstanding loan from an arrangement such as an Employee Benefit Trust on 5 April 2019. If you do not repay the loan to trustees, you will have to pay HMRC a tax charge.
The loan is being treated as taxable income retrospectively, so your tax liability could be on a loan balance built up over the last 20 years. The amount could be a few hundred or a few thousand pounds – it varies by case.
In a nutshell, the 2019 Loan Charge closes a loophole allowing businesses and employees to reduce their tax liability by avoiding tax through schemes such as Employee Funded Retirement Benefit Schemes (EFRBS) and Employee Benefit Trusts (EBT). The Charge also covers gateways, or “forms of credit” that are directly linked to employment (PAYE) income.
Who’s liable for the 2019 Loan Charge?
Under current PAYE legislation, the company/ employer is responsible for paying the 2019 Loan Charge. However, the employer is legally allowed to pass the Charge onto the employee afterwards. In fact, if they don’t, the employer is liable to additional ancillary tax consequences. HMRC can also contact the employee directly.
The most controversial aspect of the 2019 Loan Charge is individuals who took out such a loan “in good faith” will be targeted by HMRC. These individuals may not knowingly have avoided paying tax but are being punished regardless. Unfortunately, HMRC has the power to chase payment from the individual and the company. 76 MPs signed an early day motion in Parliament raising grievance over this very matter.
Right, this has me worried. What are my options?
You are legally obligated to declare your participation in any DR scheme. If you are unsure of your involvement, you are obligated to notify HMRC regardless, so they can open an investigation into your case.
If it is discovered you are part of a tax avoidance scheme, HMRC will issue a tax bill in due course. Or, you can contact them before that happens – something we actually recommend here to save your anxiety. Once HMRC has investigated your tax and confirmed the use of a DR scheme, you have a few options. Those are:
- Settle with HMRC now. You have until 30 September 2018 to register your interest to settle with HMRC. HMRC will value your total tax liability and present you with a tax bill. Pay it to set the slate clean.
- Settle the charge on 5 April 2019: The loan charge for disguised remuneration arises on 5 April 2019. This means you can pay the Charge then. If you do not have funds to pay HMRC now, you can settle in April.
- Repay the loan back to the trustees: If you have the cash, paying back your loan to the trustees is a viable option. This way, you will avoid the 2019 Charge and close the case. However, the loan has to be paid in cash. If you don’t have it, you don’t have it.
And that’s it. We recommend you reach a settlement now to close the tax year and prevent the loan charge on your account. Pay your tax, forget about it. Live your life. The deadline to register your interest to settle with HMRC ends on 30 September 2018.