18th May 2023
HMRC is now taking action against those who it believes have not been tax compliant in respect of the loan charge.
Previously, loan schemes, known as ‘disguised remuneration’ (DR), were marketed. DR schemes involved paying employees through loans instead of PAYE, and it was a way to avoid paying Income Tax and National Insurance. These loans were usually interest free, non-repayable in practice and involved the use of Employee Benefit Trusts (EBT) or Employer Financed Retirement Benefit Schemes (EFRBS).
The DR schemes have since been categorised by HMRC as tax avoidance schemes and state they do not work. The government moved to recover lost tax, setting a deadline of 30 September 2020 for taxpayers to reach a settlement with HMRC or repay the loans, otherwise the controversial loan charge would be applied.
The loan charge
The loan charge is a tax charge designed to collect unpaid tax, in relation to the DR loan schemes. The loan charge amounted to tax on the total value of all loans outstanding, as of 5 April 2019, to be declared in the 2018/19 Self Assessment tax return.
When it was first introduced, the loan charge received a lot of attention, including discussion in Parliament, and in 2019 a review into this legislation was commissioned. The review recommended various changes, including spreading the loan charge over the tax years 2018/19, 2019/20, and 2020/21
The loan charge applies to loans made between 9 December 2010 and, either 5 April 2019 for employees, or 5 April 2017 for self-employed individuals.
Following a review, all loans made prior to 9 December 2010 fall outside the scope for Loan charge purposes, as well as loans issued between 10 December 2010 to 5 April 2016, where reasonable disclosure was made to HMRC.
HMRC holds information on those it believes are subject to the loan charge and has been checking tax filings (or lack thereof). HMRC is now acting against those it believes have not properly declared the loan charge, either by not declaring or under-declaring it, in the following ways:
- Opening enquiries
- Sending nudge letters
- Raising discovery assessments for lost tax
If HMRC receives a return on or before the filing date, an enquiry can be opened within 12 months. An enquiry can be long running and intrusive and allows HMRC to check the correct tax has been paid in the tax year of enquiry.
However, HMRC is now out of time to enquire into your 2018-2019 tax return, in relation to the loan charge, if you filed on time. This does not mean you are in the clear, as HMRC will open a discovery assessment (see below) or, if you did not file at all, HMRC may be able to open an enquiry.
It is important to note that paying the loan charge does not necessarily resolve the underlying HMRC enquiries for the years in which loans were made. Tax years that are subject to an open enquiry or assessment will still need to be resolved, either by way of settlement with HMRC or, in extreme cases, through litigation.
HMRC issuing nudge letters
HMRC has been utilising a ‘one-to-many’ approach, commonly known as ‘nudge letters’ – this is where the same communication is sent to multiple taxpayers. We have seen HMRC sending nudge letters to prompt those who have not declared, nor paid, the loan charge but should have, according to its records.
This gives taxpayers a chance to disclose the required information before any further action is taken by HMRC, as well as paying any penalties or interest which may be due.
HMRC has been inviting those who may be subject to the loan charge to submit a 2018/19 tax return or to make a disclosure. Whilst not stated as an option on the letter, a professional advisor will be able to assist with further information and guidance, if you believe the loan charge does not apply to you.
Discovery assessment and penalties
HMRC has started to issue discovery assessments to taxpayers who it believes have not disclosed the loan charge, in their 2018/19 tax return.
Discovery assessments are a formal assessment which allow HMRC to collect any loss of tax.
The standard time limit for HMRC to make a discovery assessment is four years, which can be extended to six years for careless behaviour or twenty years for deliberate behaviour.
It is worth noting that you have 30 days to appeal against HMRC discovery assessments, however, if not appealed within the time limit, an assessment becomes final and therefore payable.
If you have received a communication from HMRC, or believe you may fall foul of the loan charge, we recommend that you speak to a professional tax advisor. Communications from HMRC must be taken seriously and you must act quickly to mitigate penalties and interest, where applicable and if possible.
At haysmacintyre, we understand the stress caused by HMRC in relation to the loan charge. We guide our clients through every step of the process, resolving matters in an efficient way, to ensure a clean slate going forward