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This publication is available at https://www.gov.uk/government/publications/implementation-of-recommendations-from-the-independent-review-of-the-loan-charge/implementation-of-recommendations-from-the-independent-review-of-the-loan-charge
Who is likely to be affected
Individuals, companies and employers that fall within the disguised remuneration loan charge legislation in respect of employment or trading income, including those who made certain voluntary payments to HMRC as part of a settlement.
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 tax avoidance schemes. This included the Loan Charge, a new charge on disguised remuneration loan balances outstanding at 5 April 2019. Scheme users were given three years (Budget 2016 to April 2019) to repay their disguised remuneration loans, reach a settlement with HMRC, or be subject to the new charge.
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.
The recommendations included the following changes to the Loan Charge:
- it will only apply to the outstanding balance on 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, accompanying documents, and HMRC failed to take any action (an ‘unprotected’ year)
- those affected by the Loan Charge will be able to elect to split their loan balance over three 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 for 2018 to 2019, as long as a return is filed and the tax paid, or an arrangement made with HMRC to do so, by 30 September 2020; and
- moving the date by which the online form to report disguised remuneration loans 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 for which they will need to make tax payments
Legislation to implement these, and other recommendations, was published in draft on 20 January 2020.
The government also agreed that HMRC would repay certain voluntary payments (known as ‘voluntary restitution’) paid under a qualifying agreement made on or after 16 March 2016.
The recommended refunds cover voluntary restitution in relation to loans made in unprotected years:
- prior to 9 December 2010; or
- between 9 December 2010 and 5 April 2016, where the scheme user made reasonable disclosure of their scheme but HMRC failed to take action, for example by opening an enquiry.
The Loan Charge supports the government’s commitment to tackle tax avoidance and ensures users of disguised remuneration tax avoidance schemes pay their fair share of Income tax and National Insurance contributions. The changes introduced in this measure amend the Loan Charge to address concerns raised in the Review about the impact of some aspects of the policy.
The government recognises that those who voluntarily settled their tax liability on or after 16 March 2016 have complied with their relevant tax obligations under settlement terms based on the Loan Charge applying from 6 April 1999. This measure will also ensure that the tax liability of these taxpayers reflects the decision not to apply the Loan Charge to unprotected years.
An unprotected year, for the purposes of the Loan Charge, refers to a year up to and including the tax year 2015 to 2016, where at 5 April 2019 HMRC had not acted to protect its assessing position, for example by opening an enquiry or issuing an assessment or determination.
Background to the measure
Disguised remuneration schemes are typically used by employers and individuals to avoid Income Tax and National Insurance contributions. These schemes take various forms, but they commonly result in loans from a third party on such terms that they are never repaid in practice.
The government commissioned Sir Amyas Morse to lead a review into the Loan Charge to determine whether the policy was an appropriate response to the tax avoidance behaviour in question, and to determine whether the changes the government has announced to support individuals to meet their tax liabilities have addressed any legitimate concerns raised, including about affordability of the Loan Charge for those affected.
Sir Amyas recognised that disguised remuneration loan schemes are a form of tax avoidance, and that it was right to act 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 and accepted all but one of the recommendations, to address these concerns. The government will also ensure that those who have already voluntarily settled their disguised remuneration liability also benefit from the changes to the Loan Charge.
For the policy changes which require legislation, the government will legislate in Finance Bill 2020.
This legislation will have effect retrospectively to 5 April 2019, which is the relevant date for the purposes of applying the Loan Charge. However, clauses related to repayments of voluntary payments will have effect on and after the date of Royal Assent to Finance Bill 2020.
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 is a new income tax charge on individuals (whether employed or self-employed), applying to 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”).
Schedule 11 provides that where an employee has an outstanding loan balance at 5 April 2019, a relevant step has been taken at that date. Schedule 12 provides that where a self-employed trader has an outstanding loan balance at 5 April 2019, a relevant benefit arises in the tax year 2018 to 2019. As a result these provisions recognise all outstanding loans as income in tax year 2018 to 2019.
If taxpayers agreed a contractual settlement with HMRC or repaid their loans by 5 April 2019, in accordance with the terms of repayment set out in Schedules 11 and 12, then they will not have to pay the Loan Charge and will instead pay the tax due on their earlier year liabilities. If taxpayers failed to take one of these actions by 5 April 2019, their outstanding loan balance is added to their 2018 to 2019 taxable income or trading profits. They will then receive double taxation relief against earlier years’ tax liabilities arising from the same income.
Contract settlements are entered into by the Commissioners of HMRC exercising their statutory powers. A settlement agreement ends a taxpayer’s dispute with HMRC and there is currently no legislation that allows for a refund of amounts paid under the settlement.
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 three years the legislation introduces new paragraphs into Schedule 11. New paragraph 1A of Schedule 11 sets out that a person with an outstanding loan balance on 5 April 2019 may be treated as having three equal portions of income which are taxed over three consecutive tax years, starting with tax year 2018 to 2019.
Paragraph 1A also sets out that for a customer to split their loan balance over three 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 taxpayer has made a reasonable disclosure on a tax return of a loan or quasi-loan relating to 2015 to 2016 or an earlier year, 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.
Corresponding changes are also made to Schedule 12 to implement the changes described above 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.
This legislation also introduces new clauses that require HMRC to set up a scheme under which they may make a refund of a ‘qualifying amount’ paid and associated repayment interest, or waive a qualifying amount due to be paid, under a ‘qualifying agreement’. The legislation provides definitions of terms and ensures that those who have settled and paid voluntary restitution to avoid exposure to the Loan charge will be given the opportunity to have certain voluntary restitution payments refunded to them so that they benefit from the changes to the Loan Charge and are not disadvantaged by having settled prior to the changes now being implemented. The legislation also enables HMRC to set out in the scheme who can apply for a refund, the application process, and the factors that will be taken into account by HMRC in calculating the refund due.
Voluntary restitution will only be refunded where it was paid in respect of a loan made before 9 December 2010 (when the Loan Charge no longer applies), or a qualifying loan for an unprotected year before 6 April 2016, where a reasonable disclosure of use of the loan schemes was made to HMRC but HMRC failed to take action, for example by opening an enquiry.
The scheme has also been published.
Summary of impacts
|2019 to 2020||2020 to 2021||2021 to 2022||2022 to 2023||2023 to 2024||2024 to 2025|
These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside 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 three years
By reducing the tax liability through the changes to the Loan Charge, this measure should reduce financial pressures on those who benefit.
Employed individuals with outstanding disguised remuneration loan balances to report will need to speak to their employer 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 three years. However, individuals can agree a payment plan with HMRC, based on their individual circumstances, and HMRC will not ask for more than 50% of their disposable income to be paid in their payment plan.
Around 1,000 individuals are expected either to receive a refund of voluntary restitution paid, or to face reduced instalment arrangements if it was included as part of a time to pay or instalment plan.
Individuals will need to make a claim for a refund before 1 October 2021 either directly from HMRC or through their employer. HMRC will write to individuals who might be directly due a refund to invite them to make a claim. HMRC will also advertise the refunds scheme and the need to make a claim by the deadline. Individuals should contact HMRC if they believe they are entitled to a refund and have not heard from HMRC by 30 November 2020. HMRC will then send them a claim form and work with them to ensure they receive any amount due as quickly as possible.
Those who make a claim in respect of voluntary restitution paid, or payable, on loans made between 9 December 2010 and 5 April 2016, will need to provide information on whether they made a ‘reasonable disclosure’ of their loans.
For customers who are due refunds of certain voluntary restitution payments, the customer experience in applying for those refunds will be supported by clearly defining who is eligible and the process that the customer needs to follow to obtain the refund. The process will not affect customers’ wider engagement with HMRC.
However, it is expected that these changes will have a positive impact on the majority of individuals with outstanding loan balances, who will have a reduced tax liability. As this legislation is designed to narrow the scope of the Loan Charge, and to refund, or waive, certain voluntary restitution payments, it is estimated that it will reduce financial pressures on more than 30,000 individuals. It is therefore not expected to have a negative 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 significant sums of money. Separately to this measure, HMRC are 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 working age or older who have used disguised remuneration avoidance schemes, including those who paid voluntary restitution on or after 16 March 2016 to settle their tax liability for unprotected years which are no longer in scope of the Loan Charge. 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.
Broadly the measure is expected to affect more males than females. The measure is also expected to affect slightly older individuals on balance given that earlier uses of disguised remuneration loan schemes are affected by amending the date of the Loan Charge to 9 December 2010.
HMRC will provide extra support to anyone who needs help, or anyone in vulnerable circumstances who is finding it difficult dealing with their tax liabilities in relation to the Loan Charge.
Impact on business including civil society organisations
Initial analysis suggests that moving the date the Loan Charge applies from 1999 to 2010, together with the provisions that disapply the Loan Charge where a reasonable disclosure of a loan relating to 2015 to 2016 or an earlier year was made and HMRC had not taken action to protect the year, would remove an estimated 1,000 employers from the Loan Charge.
Around 1,000 employers are expected to receive a refund of voluntary restitution paid.
One-off costs for employers will include familiarisation with the changes and could also include employers identifying employees and notifying them of these changes, as well as obtaining evidence from relevant employees that they have made a ‘reasonable disclosure’ of any loans and providing that evidence to HMRC. There may also be costs for employers who have to pass on refunds to employees who ‘made good’ amounts paid by their employer on their behalf.
Employers will need to make a claim for a refund before 1 October 2021. HMRC will write to those who might be due a refund to invite them to make a claim. HMRC will also advertise the scheme and the need to make a claim by the deadline. Customers should contact HMRC if they believe that they are entitled to a refund and have not heard from HMRC by 30 November 2020. HMRC will then send them a claim form and work with them to ensure they receive any amount due as quickly as possible.
Continuing costs could include the need to submit three 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.
Customer experience for employers impacted by the Loan Charge will vary depending on how many of their employees are affected. The employer will need to be in contact with each employee to understand how the changes have affected their liability to the Loan Charge. If the employee has decided to make an election to spread their Loan Charge balance over three consecutive tax years, the employer may be required to make amendments to the Real Time Information (RTI) returns already submitted. The more work and complexity employers face could result in reduced customer experience for them.
There is not expected to be any impact on civil society organisations.
Operational impact (£ million) (HMRC or other)
There will be costs and complexities in ascertaining which loans remain covered by the Loan Charge especially where complex avoidance arrangements affect loans made in multiple years.
IT changes are needed to amend the online form for customers to report their disguised remuneration loan 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, as well as costs related to additional communications to make taxpayers aware of their obligations. It is anticipated that these IT enhancements and additional communications will cost in the region of £600,000.
There are no IT system changes required for those due repayments, or waivers, of amounts paid, or due to be paid, through voluntary restitution.
Total costs relating to the implementation of these legislative changes include: IT changes; additional communications; processing claims for refunds; calculating and issuing payments; and negotiating amendments to existing settlement agreements. We estimate that these are in the region of £60 million over 2020/21-2024/25 – they will be subject to further refinement.
Further resource required for compliance activity and litigation to resolve outstanding tax disputes in relation to loans made before 9 December 2010 about the underlying avoidance arrangements will be considered separately.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected groups and will also be monitored through information collected from tax returns.
If you have any questions about this change, please contact the Loan Charge review team by email: firstname.lastname@example.org