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This publication is available at https://www.gov.uk/government/publications/implementation-of-changes-to-the-loan-charge/implementation-of-changes-to-the-loan-charge
Who is likely to be affected
Those likely to be affected are individuals, companies and employers that fall within the loan charge legislation in respect of employment or trading income.
General description of the measure
At Budget 2016, the government announced a package of changes to tackle existing and prevent future use of disguised remuneration avoidance schemes. The loan charge was a new charge on disguised remuneration loan balances outstanding at 5 April 2019.
In September 2019, the government commissioned Sir Amyas Morse to conduct an independent review of the loan change (the review). The review was published on 20 December 2019 along with the government’s response. The government announced that it would accept all but one of the review’s recommendations. This measure will implement those recommendations which require primary legislation, apart from the one relating to refunding certain voluntary payments in settlement agreements, which will be dealt with separately.
This measure includes the following changes to the loan charge:
- it will only apply to outstanding balances of disguised remuneration loans made between 9 December 2010 and 5 April 2019 inclusive
- it will not apply to loans made in tax years before 2016 to 2017 where a reasonable disclosure of the use of a disguised remuneration tax avoidance scheme was made within the relevant tax return or, where appropriate, associated documents, and HMRC failed to take any action (for example by opening an enquiry)
- those affected by the loan charge will be able to elect to split their loan balance over 3 consecutive years - 2018 to 2019, 2019 to 2020 and 2020 to 2021
- late payment interest will not be payable for the period 1 February 2020 to 30 September 2020 on any Self Assessment liability as long as a return is filed and the tax paid, or an arrangement made with HMRC to do so, by 30 September 2020
- moving the date by which the additional information form must be returned to HMRC from 1 October 2019 to 1 October 2020 - the form requires customers to provide full information to HMRC relating to any outstanding disguised remuneration loans which they will need to make tax payments for
The loan charge supports the government’s commitment to tackling tax avoidance and ensures users of disguised remuneration schemes pay their fair share of Income tax and National Insurance contributions. The changes in this measure amend the loan charge to mitigate concerns raised in the review about the impact of some aspects of the loan charge.
Background to the measure
The government commissioned Sir Amyas Morse to lead the review into the loan charge to determine whether the policy is an appropriate response to the tax avoidance behaviour in question, and to determine whether the changes the government has announced have addressed any legitimate concerns raised, including about affordability of the loan charge for those affected.
Disguised remuneration avoidance schemes are typically used by employers and individuals to avoid Income Tax and National Insurance contributions. There are various types but they commonly result in a loan from a third party that is on such terms that mean they were never in practice repaid.
Sir Amyas recognised that disguised remuneration schemes are a form of tax avoidance, and that it was right to take action to ensure the tax was collected. The review did not recommend overturning or revoking the loan charge. The government has confirmed that the loan charge will remain in force.
However, the government recognises the concerns raised by the review about the impact of some aspects of the loan charge. Therefore, the government will accept all but one of the recommendations which mitigate these concerns.
This legislation will implement policy changes in line with the government’s decision to accept recommendations of the review. Further details on implementation will be published in due course.
This measure will have effect retrospectively to 5 April 2019, which is the relevant date for the purposes of applying the loan charge.
Finance Act 2011 introduced the employment income provided through third parties rules at Part 7A of ITEPA 2003, commonly referred to as the ‘disguised remuneration rules’.
These rules give rise to an employment income charge on employment income paid through a third party as if it were paid directly to the employee by the employer.
The loan charge was a new Income Tax charge on individuals, applying to any loans made through disguised remuneration schemes after 6 April 1999, which had not been repaid by 5 April 2019. It was introduced in Schedules 11 and 12 to Finance (No. 2) Act 2017 (Schedules 11 and 12).
The loan charge provided that where an individual has an outstanding loan balance at 5 April 2019, a relevant step has been taken at that point. This brings all outstanding loans into tax charge in tax year 2018 to 2019.
If customers agreed a contractual settlement with HMRC or repaid their loans by 5 April 2019, then they will not have to pay the loan charge and will instead pay the tax due from use of a disguised remuneration scheme in earlier years. If customers failed to take one of these actions by 5 April 2019, their outstanding loan balance is added to their 2018 to 2019 income and is payable in the same period. They will then receive double taxation relief against liabilities from earlier years.
To change the date from which the loan charge applies to outstanding loan balances, Schedule 11 is amended. The changes being made are to paragraph (1)(1)(b) of Schedule 11. This change will amend the current date of 6 April 1999 to 9 December 2010.
To allow customers to split their loan balance over 3 years the legislation introduces new paragraphs into Schedule 11. New paragraph 1A of Schedule 11 sets out that a person with outstanding loan balances on 5 April 2019 may be treated as having 3 equal portions of income which are taxed over 3 consecutive years, starting with tax year 2018 to 2019.
Paragraph 1A also sets out that for a customer to split their outstanding loan balances over 3 years the customer must make an election to do so. The customer must also provide full information of their outstanding loans as set out by paragraph 35C of Schedule 11 before they can make an election. This election cannot be withdrawn by the customer and an election made under Schedule 11 will cover all loans captured by that Schedule and by Schedule 12.
A new paragraph 1B is inserted in Schedule 11 which narrows the scope of the charge. It provides that the loan charge will not apply where a customer has made a reasonable disclosure on a tax return of a loan or quasi-loan relating to 2015 to 2016 or an earlier year earlier, and HMRC had not, as at 6 April 2019, taken action to protect the year by, for example, opening an enquiry or issuing an assessment. Paragraph 1B additionally provides that years 2016 to 2017 onwards are within scope of the loan charge, irrespective of whether or not HMRC has taken action to protect the year.
The above changes have also been made to Schedule 12 which will implement these changes for self-employed individuals.
This legislation also makes provision to remove the charge to late payment interest for customers who are liable to the loan charge for the period 1 February 2020 to 30 September 2020 where a Self Assessment return is filed and the tax paid, or an arrangement made with HMRC to do so, by 30 September 2020. The legislation also provides that no late payment interest will be due on payments on account for 2019 to 2020 where the payments are made by 31 January 2021 or are included in a payment arrangement by that date. If the payment deadline is not met or there is no payment arrangement in place by that date, these changes will not apply and interest will accrue from the statutory due date.
Summary of impacts
This measure is expected to decrease receipts. The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at Budget 2020.
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This section does not cover the impact of the loan charge itself, which was addressed in the tax information and impact note published on 5 December 2016, and included an estimate that 40,000 individuals who had entered into disguised remuneration schemes could be affected. An additional package announced in 2016 brought a further 10,000 self-employed individuals within scope of the loan charge. The numbers below focus only on the impact of the changes to the loan charge contained in this measure.
Initial analysis suggests that more than 30,000 individuals will benefit from this measure.
An estimated 11,000 individuals will be removed from the loan charge due to the date the loan charge applies from being changed to 2010 and the provisions for those who have made reasonable disclosures.
An estimated 21,000 individuals will see the amount of tax they owe under the loan charge reduce as a result of the proposals to allow customers to split their loan balance over 3 years.
By reducing the tax liability through the loan charge this measure should reduce financial pressures on those affected.
Employed individuals with outstanding loan balances to report will need to speak to their employer in order to manage their payments of tax through their employer. Their employer will need to make manual changes to the individuals’ tax payments through the PAYE process. It is possible that some employees might have a large amount of tax recovered from their last month’s pay each year for 3 years.
By making the loan charge more affordable, these changes will have a positive impact on the majority of individuals with outstanding loan balances. As this legislation is designed to narrow the scope of the loan charge it is estimated that it will reduce financial pressures on more than 30,000 individuals. It is therefore not expected to negatively impact on family formation, stability or breakdown for these individuals.
The government recognises that many individuals may still face tax liabilities related to their use of disguised remuneration schemes following these changes, and that for some, this could involve large sums of money. Separate to this measure, HMRC is implementing a number of changes for individuals who cannot pay the tax due, and who are in need of bespoke arrangements to pay their tax debts.
This measure will affect those of a working age or older who have used disguised remuneration avoidance schemes. It is not anticipated that this measure will have a significant, or disproportionate, impact on groups with protected characteristics as recognised in the Equality Act 2010.
Impact on business including civil society organisations
Initial analysis suggests that moving the date the loan charge applies from to 2010, together with the provisions for those who have made reasonable disclosures, would remove an estimated 1,000 employers from the loan charge.
One-off costs for employers will include familiarisation with the changes and could include employers identifying employees and notifying them of these changes they are able to take advantage of.
Ongoing costs could include the need to submit 3 annual end of year updates to account for the loan charge for any employees who do elect to split their loan balance. They may have to recover tax from employees in each of those years.
Given that most employers already account for regular payroll runs, it is not expected that this will be a significant addition to their administrative burden. Employers may need to make some changes to their process to account for specific issues relating to the loan charge. There is expected to be no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
There will be costs and complications in ascertaining which loans remain covered by the loan charge especially where complex avoidance arrangements affect loans made in multiple years. Further resource will need to be put into compliance activity and litigation to resolve outstanding tax disputes in relation to loans made before 9 December 2010 about the underlying avoidance arrangements and ensure the correct amount of tax is collected.
IT changes are needed to amend the additional information form and to allow elections to be made to spread an outstanding loan balance. These elections will need to be processed manually to ensure they are correct. This has an additional staff cost.
HMRC will need to make enhancements to existing IT tools to enable customers to take advantage of these changes. It is anticipated that these IT enhancements will cost in the region of £200,000.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups and will also be monitored through information collected from tax returns.
If you have any questions about these changes please contact the loan charge review team by email: email@example.com.
Rt Hon Jesse Norman MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.