The Finance (No.2) Act 2017 (FA2), given Royal Assent in November 2017 controversially introduced the ability for HMRC to, in effect, go back 20 years to recover unpaid tax on certain trust based tax mitigation strategies.
In very brief summary, the Loan Charge will apply in circumstances where a trust has been established by a company, through which employees have been remunerated by:
- A sub-trust being set up in the name of the employee;
- Monies being paid into the sub-trust by the employer; and
- Monies being “lent” to the employee from the sub-trust, free of any income tax or NIC.
[NB – this is a very simple explanation. For more detail, see some of our earlier articles referenced below]
We have been advising clients on the implication of the Loan Charge prior to Royal Assent – for more detail, see for example:
- The 2019 Loan Charge;
- Frequently Asked Questions – 2018; and
- The Loan Charge – 3 Months To Go.
Below we deal with how HMRC intends to implement the Loan Charge, looking at who has obligations in light of the legislation and consequences of default.
How it will be calculated
Pursuant to the legislation, the Relevant Date for most individuals with outstanding loans will be treated as being 5 April 2019 – being the date at which the Loan Charge legislation bites down. This means that unless the tax payer has agreed an appeal, some form of settlement or the loan is a fixed term loan, then all recipients of loans from trust based schemes will be treated as if the loan had been paid to them as income on 5 April 2019 – i.e. within the 2018/19 tax year.
The value applied to the tax calculation at the Relevant Date is the full amount of the outstanding loans owed to the trust by the employee, including any notional or actual interest that has accrued on the outstanding loans.
How should it be notified
The onus on reporting an outstanding loan falls on the employee – the recipient of the loans. If the employee has died, the onus is on the personal representatives to ensure that everything is properly reported. The legislation sets out that outstanding loans must be reported to HMRC before the end of 30 September 2019 (except where settlement terms have been agreed with HMRC before that date).
The report must set out at least the following (for more details see Schedule 11, paragraph 35D of the Finance No2 Act 2017):
- Employee’s details (or if deceased, personal representative’s details) and all contact information;
- Employee’s tax details (national insurance number, unique taxpayer reference etc.);
- Company’s name;
- Information about the loans;
- Value of outstanding loans; and
- If applicable, any DOTAS (disclosure of tax avoidance schemes) number that has been allocated to the specific scheme.
If an employee fails to provide the above information by the end of 30 September 2019, they will be liable to a penalty of £300, plus further daily penalties of up to £60 a day (for up to 90 days) for as long as the information is not provided.
If inaccurate information is provided to HMRC, and HMRC considers that inaccuracy to be the result of careless or deliberate behaviour, a further penalty of up to £3,000 can be applied. Such a penalty would be payable for each inaccuracy.
There is also an obligation on the employee and trustees to provide information to the employer company, so as to allow it to make appropriate provisions for payment to HMRC.
Applying to PAYE
As set out above, at the Relevant Date (5 April 2019) the outstanding loans will be treated as income of the employee, paid on 5 April 2019. To facilitate this, the employer is required to take the necessary steps to pay the income tax and NICs due on the outstanding loans through its normal PAYE procedure. This step must be taken pursuant to the usual timeframes – i.e. the liability must be paid to HMRC no later than 21 April 2019.
How much will be due?
The rate of tax payable will depend on the level of the outstanding loan and the balance of other income taken in the last 12 months. The easiest way to treat this is to consider what tax would be payable if you had received a bonus in the sum of the outstanding loan on the Relevant Date, and been taxed accordingly (albeit without receiving the actual bonus).
What if the employer can’t pay?
In circumstances where the employer is not in a position to make good the income tax and NICs due to HMRC – for example, if the company is insolvent or simply doesn’t have the necessary cash available – then HMRC will pursue the individual employees by making a Regulation 80 and 81 Determination. This has the impact of attaching the liability to the employee directly.
Where the company no longer exists, the employee is expected to file a self-assessment tax return with the outstanding loan amount set out therein.
A final warning
Even though the liability for the income tax and NICs falls at the feet of the employer at first instance, it is incumbent on the employee to be able to make that good. If they are unable to, then the payment of the income tax and NIC will be treated by HMRC as a further benefit. The employee will be subject to income tax and class 1 NICs on that sum accordingly.
If you are concerned about the Loan Charge and want to discuss this further, contact our Tax and Financial Services Litigation Team on 01926 883037.