The loan charge has been controversial since it was introduced in 2016 - not least its retrospective application and original requirement to pay all the tax owed within one tax year (2018/19). After considerable pressure exerted by a number of action groups, supported by MPs from both sides of the House, the government commissioned a review into the loan charge, headed by Sir Amyas Morse, which published its recommendations earlier this year.
The government accepted all its recommendations (bar one), acknowledging that thousands of ordinary people had been drawn into these schemes and were now suffering considerable distress as a result of HMRC demands to pay income tax and NIC on loans which, in some cases, stretched over several years. Nonetheless, in spite of HMRC’s continued success in exposing most tax avoidance schemes as disguised remuneration schemes, there are still professional advisers that maintain they have found a way to sidestep paying the loan charge.
The fight to contest the loan charge continues
Sir Amyas’ report recognised that many people who had taken advantage of disguised remuneration tax avoidance schemes had not done so in a spirit of evasion but rather mitigation, having been convinced by the promoters of these schemes that they were approved by HMRC. The changes to the loan charge implemented as a result of his recommendations do recognise this fact although the fight to contest the charge goes on. In April, the High Court dismissed the two claims before it that the loan charge legislation should be subject to judicial review (Zeeman and Murphy v HMRC) on the grounds that it interferes with the ‘property rights protected by Article 1 of the First Protocol of the European Convention on Human Rights’. The case revealed the claimants’ core argument against the loan: ‘the employee obtained no benefit (or at least none of the value) from the loan because it was counterbalanced by the obligation to repay, however unlikely it was to be enforced. At most he gained a cashflow advantage’. In other words, the loan was a loan even if not always lent on commercial terms. It is worth noting that the judge did not agree.
A loan is a loan
It is this reasoning that appears to be behind a claim by a firm of tax advisers that, by filing the loan charge reporting form of the self-assessment tax return, those people who have taken loans from EBTs will not be liable for the loan charge because ‘a loan is a loan’. Our view is that this is semantics. Throughout Zeeman and Murphy v HMRC, the judge was at pains to point out that if a loan is received as a reward for work done, or services provided, then it is, to all intents and purposes, remuneration: ‘If that is the true nature of the payment (i.e. for compensation for someone’s services) it does not matter how the payment is structured and whether it is discretionary or obligatory’.
The tax adviser’s website encourages those affected by the loan charge to subscribe to what appears to be a class action against paying it. It also goes on to claim that even if HMRC was successful, the process through the courts would be so lengthy that all participants would gain a cashflow advantage, enabling them to save money in the interim which, in turn, could go towards paying off the loan. As we have regularly pointed out in the past, if something is too good to be true, it almost certainly is.
Reporting the loan charge to HMRC
The government has issued guidance on reporting and accounting for your loan charge and we recommend reading and understanding it as it applies to your own situation. As a result of Sir Amyas’ review, the government has changed the rules about how to pay, making it much less onerous than previously. The main changes are:
- The loan charge will only apply to disguised remuneration loans made since 9 December 2010 and were still outstanding on 5 April 2019. HMRC will no longer pursue loans made before 9 December 2010.
- Any loans reported to HMRC between 9 December 2010 and 5 April 2016 will not be subject to the loan charge if HMRC did not take any action.
- The deadline for reporting loans is 30 September 2020.
- Providing the loan has been reported to HMRC by the 30 September deadline, affected individuals can elect to spread payments over three tax years, or agree a payment plan
It is worth noting that once you have elected to spread your payments, you cannot change your decision so, as there may be tax implications depending on the amounts involved, we strongly advise seeking professional help before electing to spread your payments.
How can we help?
We have already helped many clients deal with the loan charge correctly and have successfully negotiated a number of settlements with HMRC on behalf of our clients.
However, on a wider note, if you think that you have been unfairly targeted by HMRC because you entered into one of these schemes in good faith believing that, having taken professional advice, it had HMRC’s approval, you may have a claim against your professional adviser if they failed to outline the inherent risks of a tax avoidance scheme.
We have successfully pursued claims for compensation on behalf of a number of clients against their accountant, financial adviser, tax adviser or even their solicitor. These professional advisers owed a duty of care to provide honest and appropriate advice on the risks associated with tax avoidance. If you feel you were not adequately or appropriately advised, you may have a claim for professional negligence.
We are also launching a Judicial Review for taxpayers who have repaid loans, as a result of HMRC’s guidance pre-loan charge review, that would no longer be liable for the loan charge.