The government will review the charges faced by thousands of people who used a tax-saving scheme by paying themselves by a ‘loan’, Prime Minister Boris Johnson has announced, despite a looming deadline for those affected to tell HM Revenue and Customs about their affairs.
Dubbed the ‘loan charge’, an estimated 50,000 people face mounting repayments for tax they owe, which they believe they had avoided using the scheme.
In May 2019, the government stated that £1bn had already been collected from loan charge taxpayers, with billions more expected. This is part of a clampdown on what the government sees as ‘aggressive tax avoidance.’
However, the PM’s announcement during Prime Minster’s Questions on 4 September has put the whole system in the question, as Mr Johnson dubbed the loan charge a ‘very, very difficult issue’ and vowed to ‘have a thorough review of the situation’.
Those affected face repayment of tax dating back as much as two decades.
Anyone who hasn’t already declared loans received from ‘disguised remuneration schemes’ – how the government describes this kind of scheme – since 6 April 1999 had been told they must contact HMRC will full details of the loans by 30 September.
Here, we explain what the loan charge is, who’s affected by it and what your options are if you can’t afford to pay it back. The facts are consistent with the current advice on gov.uk, but this is subject to change depending on what happens with the review.
What is the ‘loan charge’?
The 2019 loan charge is a measure HMRC has implemented to reclaim the tax owed from ‘disguised remuneration schemes’, dating back to April 1999.
HMRC describes them as ‘tax avoidance schemes’ – many of which had been recommended by accountants or financial advisors – where income tax and National Insurance contributions (NICs) were avoided by paying people their income in the form of a loan.
Typically, a company using the services of a self-employed worker would pay money into another ‘umbrella’ company. This firm would then loan the money to the worker, meaning that no taxes were payable. Instead, the worker paid interest on the loan.
However, as HMRC says the loans were never intended to be repaid, the money people received from the loans is no different from normal income and is therefore taxable.
Everyone who used a disguised remuneration scheme since 6 April 1999 will have to pay income tax and NICs on the loans or payments made, as well as late payment interest for any years where HMRC has an open enquiry into your tax affairs.
Penalties and even inheritance tax may be payable.
The costs of repaying up to 20 years of tax can run into hundreds of thousands of pounds.
It’s estimated that around 50,000 individual taxpayers are affected, many of whom are management and IT consultants, people working in construction, and up to 1,500 doctors, nurses and teachers.
The government expects to raise £3.2bn from the repayments.
How do I know if I’m affected?
HMRC told us it has written to more than 40,000 people about the loan charge – but as it estimates around 50,000 people are affected, there is a chance you could still owe money even if you haven’t received a letter.
HMRC says that, through sending letters, advertising on social media, targeting messages to affected business sectors and publishing information on gov.uk, that ‘anyone who has used a disguised remuneration tax avoidance scheme should be fully aware of the loan charge and their obligations’.
Who has to pay the loan charge?
The loan charge only needs to be paid by those who haven’t already repaid the money owed on their loans or agreed on settlement terms with HMRC.
If you told HMRC about your loans before 5 April 2019
Those who submitted remuneration loan information to HMRC by 5 April this year were given options to reach a payment settlement under the more favorable ‘November 2017 settlement terms’.
Under these terms, you must repay:
- income tax on the net amount of all disguised remuneration loans, calculated using the bands and rates in the years the loans were made
- National Insurance contributions if you’re a self-employed contractor
- late payment interest for any years where HMRC has an open enquiry into your tax affairs, or where HMRC are within time limits to open an enquiry
- any penalties and inheritance tax, if applicable.
Repayments can be spread over five years if you earn less than £50,000, or over seven years if you owe £30,000, and you won’t pay the loan charge.
If you missed the 5 April deadline
You’ll have to report and pay the loan charge, and possibly additional taxes owed from any open tax enquiries.
How is the loan charge calculated?
Even if you’ve made repayments on a disguised remuneration loan, HMRC determines the loan to be outstanding if you owe more than you’ve repaid.
The loan charge is the tax owed on the total balance of all outstanding loans as they stood on 5 April 2019. These will be treated as though you received the loans as income or profits on that date.
This means that you’ll have to pay income tax and National Insurance contributions on any outstanding loans as if they were earnings or profits you’d made during 2018-19; hence why those affected must submit self-assessment tax returns by 31 January 2020.
If you’re self-employed, the loan charges will be added to your other income and expenses for that year.
How to tell HMRC about your loan charge
You can report a disguised remuneration loan to HMRC online, but you’ll need to have a Government Gateway user ID and password to login.
If you’ve used more than one scheme, you’ll need to provide separate details for loans for each one.
- Find out more: what is PAYE?
What if you miss the 30 September deadline?
While the prospect of having to repay tax owed, penalties and a loan charge is far from appealing, things could get much worse if you don’t submit the information by midnight on 30 September.
According to its guidance online, being late or submitting incorrect information could result in even more penalties, which could potentially reach thousands of pounds.
If you’re late, you’ll get:
- an initial penalty of £300
- further daily penalties of up to £60 a day for as long as the information remains outstanding, up to a maximum of 90 days.
If the information is incorrect, you’ll be charged a penalty of up to £3,000 for each inaccuracy that’s deliberately or carelessly included if you do not tell HMRC before it’s discovered.
What if you can’t afford repayments?
Some of the loan charge figures individuals have been faced with run into hundreds of thousands of pounds – money that a lot of people don’t have the means to pay back.
The good news is, there are some options, and you shouldn’t risk losing your home or being made bankrupt.
HMRC says it will not force anyone to sell their main home to pay their disguised remuneration debts or the loan charge, and insolvency will only be considered as a ‘last resort’, and will only be considered if ‘users are either at risk of accruing further tax debt, or where they actively avoid paying what they owe’.
Instead, HMRC says it’s willing to agree to payments by instalments and will consider each person’s ability to pay on a case-by-case basis by a dedicated team.
There is no maximum time limit on how long someone can be given to make the repayments – so, while the debt can hopefully be made manageable, it doesn’t look like it will be written off.