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HMRC internal manual

Employment Income Manual

Loan charge relevant step: interaction with taxation of original loan or quasi-loan

Schedule 11 F(No 2)A 2017

Whether the deemed relevant step in relation to the loan charge is taken on 5 April 2019 or on a different date, it will give rise to an amount which counts as employment income for the employee concerned. It will however be based on an earlier loan or quasi-loan which may have given rise to a previous charge to tax.

Where this is the case, Pt 7A includes double taxation provisions to ensure that an employee is not taxed twice on the same amount of income. For details of these, please see EIM46002.

Where tax has been fully settled on the amount of the previous loan or quasi-loan prior to the relevant date, the loan charge provisions will not apply. The payment condition in section 554Z5(4) will be met and the value of the loan charge relevant step will be reduced by the amount of income which overlaps with the settled liability (see EIM46010).

If tax has not been fully settled on the previous liability, double taxation of overlapping amounts of income is prevented by sections 554Z11B and C (see EIM46025). The amounts paid against a particular charge will be used to reduce other liabilities to the extent that the underlying income overlaps both charges.

Where a previous charge to tax is not based on a loan or quasi-loan as defined in Finance Bill (No 2) 2017, it is not necessary to consider how taxation of that particular charge interacts with the loan charge. An amount may be taxable as earnings on contribution to a trust for example which is not a loan for the purposes of loan charge.

If however such a contribution has not been taxed and a loan has been subsequently made from that contribution, an earnings charge exists on contribution, a Pt 7A charge exists on the making of the loan and the 2019 loan charge will still apply if any balance of the loan is outstanding at 5 April 2019.

If tax was paid on the contribution to the trust, the subsequent loan relevant step would still be chargeable under Pt 7A if taken on or after 6 April 2011 although the charge would be reduced to the extent that the loan overlapped with the contribution. The loan from the contribution would be a relevant step taken by a third party in pursuance of arrangements in connection with an employee’s employment. Double taxation would be prevented since the payment condition in section 554Z5 would apply to reduce the value of the relevant step taken on the making of the loan. The loan charge would also still apply if any balance of the loan is outstanding.  The amount of the loan charge relevant step would however again be reduced by the provisions of section 554Z5(4) or (5) to the extent that the income overlaps with the earlier charges.