April 2019 Loan Charge – Where are we now?

23 April 2018

The Finance Act 2018 received Royal Ascent on 15th March 2018 bringing into law the “Loan Charge” which imposes a tax and potentially a national insurance charge on anyone who has an outstanding balance at 6th April 2019 on a disguised remuneration loan taken out since 6th April 1999.

There are many complexities as to how this charge will be applied but essentially if you have used a contractor loan arrangement and the balance has not been repaid before 6th April 2019 then the balance is taxed upon you as if it were income arising on 5th April 2019, ie in the 2018/19 tax year.

As the amount is assessed as one lump sum amount it will only benefit from one year’s worth allowances and tax bands despite the fact it may have arisen over a number of years. Tax will be payable along with the taxpayers other income for the year and it will be taxed as if it were a payment caught under Part 7A of ITEPA 2003.

On 7th November 2017 HMRC announced a settlement opportunity enabling those affected to settle on preferential terms, broadly treating the loans as income within the years they arose, this is likely to result in a lower charge than that under the loan charge. Penalties and interest will also however need to be considered.

To take advantage of the settlement opportunity those affected need to register their interest with HMRC by 31 May 2018, then provide HMRC all the information necessary to calculate the tax and national insurance due by 30 September 2018. HMRC have also confirmed payment plans will be an option.

If you don’t take advantage of the settlement opportunity what are your option?

Firstly, you can pay the loan charge, there will be no penalties and interest as long as it is paid by the due date.

As to the due date the liability initially falls upon the employer, or if the employer is offshore upon the client. If the employer or the client are unable to pay then HMRC will issue a Regulation 81 notice shifting the liability onto the worker. This could therefore be payable as early as 6th June 2019.

However, if the employer no longer exists then the liability is reportable on the workers 2018-19 self assessment. In this case the liability will be payable by 31 January 2020.

Secondly, you could pay back the loan, it is likely that once repaid the funds will be available to be distributed to you in a taxable form, some (within the annual limits) may be contributed tax efficiently into your pension funds.

Finally, you may be able to enter into a further arrangement such that the loan charge does not apply, however if you do so you need to have good reason as the loan charge legislation has been drafted widely to eliminate the possibility of planning around the charge. HMRC have categorically stated that any scheme designed to avoid the charge will fail, any arrangement entered into therefore needs to have genuine commercial substance.

Over the last few years HMRC powers have widened significantly, and there are some hefty new penalty provisions. For example, new penalties have been imposed for offshore evasion, penalties of up to 200% of the underdeclared tax could be imposed. Along with this new penalty comes the requirement to correct underpaid tax liabilities for offshore interests before 30 September 2018 otherwise the full force of the new penalties will be imposed.

Most contractor loan arrangements were backed by tax Counsel opinions that they did not give rise to a tax charge. However, the Loan Charge negates these opinions by creating a second tax point on these loans on 5th April 2019. At worst being involved in these arrangements could originally have been considered avoidance by HMRC, but with the lines between avoidance and evasion blurring ignore the Loan Charge at your peril.

If you would like any assistance in quantifying your exposure under the loan charge, or quantifying and settling under the settlement opportunity then please contact us or get in touch today by calling 0203 039 3993.

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