What is the 2019 Loan Charge?
Introduced by the Finance (No. 2) Act 2017, it is a tax charge on any outstanding loans that exist as a result of a disguised remuneration tax avoidance scheme (DR scheme). It applies to any loans that were taken out under a DR scheme since 6 April 1999.
The most common DR schemes were Employee Funded Retirement Benefit Schemes (EFRBS) and Employee Benefit Trusts (EBT). When used for tax avoidance, both involved the diversion of employment income to a trust; the trust would then ‘loan’ the employment income to the individual (meaning no PAYE tax was paid) who sought to benefit from the DR Scheme.
However, trust structures were not the only mechanism used by scheme promoters that fall within the ambit of the 2019 Loan Charge. Subject to passing through a defined “gateway”, a liability will crystallise on loans or “forms of credit” that have been granted and are linked to employment income absent a specific trust structure.
Can I ignore it?
No. A failure to engage in the process will result in further liabilities arising. If you fall within the regime, some action will have to be taken. If: (1) you have a loan that relates to a DR scheme; and (2) the loan is outstanding on 5 April 2019; then an automatic tax charge will arise. Doing nothing now will, therefore, only delay a tax charge. The timing and responsibility for that tax charge will vary depending on your circumstances.
The relevant parties to these transactions (usually an employer, employee and trustee) will have a duty to provide the relevant information to HMRC and/or the employer to calculate the liability that falls due.
Who is liable for the 2019 Loan Charge?
It is the responsibility of the employer/company to pay the 2019 Loan Charge under PAYE legislation. The employer is then expected to pass this cost on to the individual. If it doesn’t, there are ancillary tax consequences.
While the initial liability falls to the employer/company, it can be passed to the individual beneficiary of the DR scheme by HMRC (see below).
What are my options?
Primarily there are four options:
(1) Settle with HMRC now;
(2) Repay the loan in money (repayments made in anything other than money will not count);
(3) Pay the 2019 Loan Charge; or
(4) Consider the insolvency process
Which option is best for you will depend upon your/your company’s circumstances. As outlined below, the initial deadline to register your interest to settle with HMRC was 31 May 2018. This has now been extended to 30 September 2018. However, you should seek advice on your options as quickly as possible.
If you do repay the loan, there remains a requirement to declare your participation in the DR scheme. Any loans repaid after the 17 March 2016 have to be declared to HMRC. HMRC will then, in all likelihood, enquire into your repayment to verify the same. It would be best if you took advice on repaying the loan before doing so as there will be tax consequences of withdrawing that money at a later date.
I have been advised by my professional adviser to use an arrangement/scheme that mitigates the 2019 Loan Charge; is this a good idea?
On 14 February 2017 HMRC published Spotlight 36 which was titled “Disguised remuneration: schemes claiming to avoid the new loan charge”. It states:
“Some promoters claim to have come up with schemes that enable users to get out of the loan arrangements and avoid the loan charge, in return for a fee.
These schemes don’t work. The only way you can avoid the new loan charge is by making a genuine repayment of the loan balance or settling the tax liability with HM Revenue and Customs (HMRC) in advance. Any repayments connected to a new tax avoidance arrangement will be ignored, and the loan charge will still apply.”
Can I settle with HMRC?
HMRC has a settlement opportunity for those caught by the 2019 Loan Charge. The deadline to register your interest to settle with HMRC has been extended from 31 May 2018 to 30 September 2018.
I have paid APNs, does that mean the 2019 Loan Charge won’t apply to me?
People often mistakenly believe that paying an Accelerated Payment Notice (APN) (see here) amounts to a settlement with HMRC. An APN is, in essence, a payment on account to HMRC. A HMRC enquiry is only concluded upon an assessment/determination by HMRC.
In short, the answer to this question is yes. The 2019 Loan Charge will still apply to you unless a settlement has been reached with HMRC. However, there is a double taxation provision in the Finance (No. 2) Act 2017 so credit will be given for any tax already paid.
Is insolvency the route forward?
Many people who approach us have been told or believe that liquidation/corporate insolvency will resolve the position (the 2019 Loan Charge tax liability “dies” with the company). Unfortunately, that is not necessarily the case. HMRC has confirmed that if the employing company cannot pay the tax due it will seek to pass the liability to the individual beneficiary of a DR scheme:
“HMRC will issue a regulation 80 determination in respect of the unpaid tax included in their Real Time Information (RTI) return. Once this determination has been unpaid for 30 days, HMRC will use regulation 81 to direct the liability on to the employee. The unpaid tax will then be collected from the employee directly.”
If a company is already dissolved, again, HMRC has confirmed that it will pursue the individual beneficiary of a DR scheme.
Further, HMRC has informed us that in the event of a company going into liquidation, where the facts are appropriate, they will ask the appointed Insolvency Practitioner to look closely at potential misfeasance claims against directors for the 2019 Loan Charge liability.
I only did this because I was advised to do so by my adviser, can I claim any compensation from my professional adviser?
It may be the case that the advice received when the DR scheme was implemented was negligent. If that is the case, there may be a professional negligence claim against the advisers associated with the scheme, which we can advise you on and provide funding arrangements where appropriate.
We are aware that a number of advisors are saying that the only reason clients are facing the current predicament is due to the implementation of retrospective legislation resulting in the 2019 Loan Charge. That is correct in some case, but not all. It appears that a significant amount of businesses/individuals were poorly advised at the outset and “sold” schemes that would have been successfully challenged by HMRC, irrespective of the 2019 Loan Charge.
For more information, please see here.