Loan charge review: Government response

The Government has published its response to the Loan Charge Review, accepting a number of its recommendations concerning the moderation of the charge and its administration. In particular, the Loan Charge will no longer be applied to loans made before 09 December 2010 and will not be applied to loans where the taxpayer had fully disclosed the use of the loan scheme to HMRC and HMRC had failed to action to enquire into the tax return.

These changes, along with other changes designed to spread the charge or enable it to be paid over a longer period, should be welcomed by those affected and will go a long way to lessen the disproportionate impact of the original legislation.

Background

The controversial disguised remuneration loan charge (Loan Charge) was introduced in Finance (No 2) Act 2017 and was expected to bring in £3.2bn by requiring taxpayers who used loan-based avoidance schemes to pay tax on up to 20 years of income in one financial year.

Essentially, it brings employment-related loans made by third parties after 05 April 1999 within the charge to employment tax, under the disguised remuneration rules, if they remain outstanding on 05 April 2019. Despite its success in the Glasgow Rangers case (2017 UKSC 45), HMRC had found itself in a position where it could not apply the law to many existing loan based schemes as these were long out of time. The Loan Charge was the Government’s response to this.

HM Treasury reported on the Loan Charge in 2019. It noted that the loan schemes targeted were “a clear example of some of the most contrived avoidance within the tax system”. It also rejected the contention that the Loan Charge was retrospective, arguing that it “applies a tax charge to outstanding DR loan balances at 05 April 2019. It does not change the tax position of any previous year, the tax treatment of any historic transaction, or the outcome of any open compliance checks. By the time of its introduction on 05 April 2019, individuals will have had three years since the Budget 2016 announcement to act to stop it applying, either by settling their liability with HMRC or repaying their loans”. The report concluded that “The government considers that the rationale for this charge is clear and robust, and has been consistently clear there is no intention to change the relevant legislation which has been enacted by Parliament.”

In September 2019, however, HM Treasury announced a review into the Loan Charge, recognising that concerns had been raised about the policy. The independent review, led by Amyas Morse, former chief executive of the National Audit Office, considered the impact of the Loan Charge on individuals and in particular whether it was an appropriate response to the tax avoidance concerned. The Review was published in December 2019.

Independent Review and response

The Independent Review concluded that, whilst the Government was right to take action against the tax avoidance schemes that were the target of the Loan Charge, there were nevertheless serious questions about how proportionate the Loan Charge was in terms of its design and effect on individuals. These concerns prompted the Review to make a number of recommendations concerning the imposition of the Loan Charge and the collection of tax due under the Charge.

The first concern for the Review was the length of time that the Loan Charge looked back – bringing schemes used since 1999 into scope. As justification for such retrospective impact, the Government took the view that it had always said that the schemes did not work. The Review concluded that HMRC did not consistently articulate this to taxpayers before legislation introduced in 2011. For the twenty year look-back period of the Loan Charge to be proportionate and justified, taxpayers would need to have acted in a way that was perverse in light of a clear legal position. This was not the case. The Review therefore concluded that the Loan Charge should not apply to loans entered into by either individuals or employers before 09 December 2010, being the point at which the law became clear.

A second concern was the perceived inconsistency of the Loan Charge with other elements of tax policy. In particular, HMRC are bound by strict time limits within which they can investigate tax returns. These give taxpayers certainty over their tax affairs and ensure that HMRC opens investigations in a timely way. The Loan Charge effectively overrides these limits, by treating years in which HMRC opened an investigation (known as Protected Years) in the same fashion as years in which HMRC didn’t open an investigation (Unprotected Years). As a result, the Review recommended that taxpayers who made reasonable disclosure of their scheme usage, but for whom the relevant year is unprotected, should not have that Unprotected Year included in the scope of the Loan Charge.

In large part, the Government has accepted these recommendations in its Response. In particular, the Government has announced it will make a package of changes to the loan charge. The key changes to the loan charge are:

• The loan charge will apply only to outstanding loans made on or after
  09 December 2010 (though HMRC may still be able to recover unpaid tax
  through the usual assessment process where they are not out of time).

• The loan charge will not apply to outstanding loans made in any tax
  years before 06 April 2016 where the use of the avoidance scheme was
  fully disclosed to HMRC and HMRC did not take action (for example, by
  opening an enquiry).

• Affected taxpayers will be able to elect to spread the amount of
  their outstanding loan balance evenly across 3 tax years: 2018 to
  2019, 2019 to 2020 and 2020 to 2021.

• HMRC will refund payments already made (once the necessary
  legislation is enacted) in order to prevent the loan charge arising
  and included in a settlement agreement reached since March 2016 for
  any tax years where:

  • the loan charge no longer applies (loans made before 09 December
    2010)

  • loans were made before 06 April 2016, the avoidance scheme use was
    fully disclosed to HMRC and HMRC did not take action (for example, by
    opening an enquiry)

The package also includes a number of changes that will give affected taxpayers additional flexibility over the way they pay:

• For those without disposable assets and earning less than £50,000,
  HMRC will agree time to pay arrangements for a minimum of 5 years.

• For those earning less than £30,000, HMRC will agree a minimum of 7
  years.

• in line with existing practice, if an affected taxpayer needs further
  time to pay, they will pay no more than 50% of their disposable
  income, unless they have a very high level of disposable income.

However, the Government has not accepted all the recommendations. In particular, the Government rejected the recommendation that it should introduce a write-off of tax due on the loan charge after 10 years for individuals whose time to pay arrangement is longer than 10 years.

Given the 31 January 2020 deadline for the 2018/19 self-assessment tax return including any Loan Charge, the Government has also announced that taxpayers may either:

• meet the statutory filing deadline but give a best estimate of the
  outstanding balance or

• defer filing until no later than 30 September 2020. If taxpayers
  defer, HMRC will waive any penalties for late filing or late payment
  etc. In addition, HMRC will not charge any interest on amounts
  falling due at 31 January 2020 so long as the tax is paid, or
  arrangement for payment entered into, by 30 September 2020.

Recommendations for the tax system

The Independent Review also included a number of wider recommendations on the tax system. In particular, the Review recognised that there has been a significant increase in HMRC’s powers over the last decade to combat tax avoidance. Whilst the Review supported this increase (linked to the evolution in public attitudes towards tax avoidance), it also expressed concerns over HMRC’s accountability and capacity to manage relationships with individual taxpayers. The Report therefore makes further recommendations to better match the performance and accountability of HMRC with their increased powers, aimed at enhancing trust in HMRC.

These recommendations include the need for HMRC to update taxpayers at least annually about the status of open tax enquiries and the need for HMRC to review its Charter to set higher expectations of performance and ensure staff are trained to meet these performance expectations.

Comment

The Loan Charge has proved a controversial and politically charged issue since it was brought in. To the extent that it was intended to draw a line under this type of tax avoidance, it clearly did not entirely succeed and the independent review is something of a victory for those who have campaigned that it is in some ways unfair and disproportionate.

The Government will now need to legislate to implement the announced changes.

Further guidance on the Loan Charge can be found at: https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review