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19 Jan 2020

Government to change loan charge rules: what does this mean for your tax return?

The changes affect those who must declare their loan charge in their tax return

Thousands of taxpayers facing huge bills as a result of HMRC's loan charge review could pay less or have their debts written off, thanks to a package of changes being brought in by the government.

The changes are off the back of an independent review which looked into how measures to claw back the tax have been implemented, as thousands of workers faced huge tax bills covering up to 20 years of missing payments.

Published in December 2019, the government's package of changes will affect both those who have already reached a settlement agreement and those who are yet to submit their self-assessment tax return detailing the loan charge they owe.

Here, we explain what the loan charge is, you who needs to pay it and how the changes will affect your 2018-19 tax return.

What is the loan charge?

In 2019 HMRC implemented the loan charge in order to reclaim the tax owed from disguised renumeration schemes dating back to April 1999.

They have been described as 'tax avoidance schemes', although many were recommended by accountants or financial advisers.

The schemes allowed people to have their income paid in the form of a loan. This would usually work by a company using the services of a self-employed worker paying money into another 'umbrella' company.

The firm would then loan the cash to the worker, meaning that no income tax and National Insurance contributions (NICs) were payable. Instead, the worker paid interest on the loan.

However, HMRC says the loans were never intended to be repaid and so the money people received from the loans should not be viewed any differently to normal income, and therefore it is taxable.

Before the review, HMRC had said that everyone who used a disguised renumeration scheme since 6 April 1999 would have to pay income tax and NICs on the loans or payments made, as well as late payment interest for any years where HMRC had opened an enquiry into someone's tax affairs.

This commonly resulted in people facing tax bills of hundreds of thousands of pounds, with an estimated 50,000 taxpayers being affected.

The government had expected to raise £3.2bn from the repayments, but this is likely to be much less following the changes.

How is the loan charge set to change?

An Independent Loan Charge review was published in December 2019, looking into whether the loan charge policy undermines taxpayers rights, and considering the distress and hardship among those affected.

A number of recommendations were made, and the government has responded with a package of changes - some of which could massively alter what people owe.

The key changes are:

  • Timing - the loan charge will now only apply to outstanding loans made on or after 9 December 2010 - previously, it took in loans made on or after 6 April 1999
  • Writing off some debts - the charge will not apply to any outstanding loans before 6 April 2016 if HMRC had been told about the disguised renumeration scheme and didn't take any action eg. opening an enquiry
  • More repayment options - you can now spread the amount of the outstanding loan balance evenly across three tax years (2018-19, 2019-20, 2020-21), which could help make the payments more manageable. Other repayment options may be possible if you are unable to repay the loan under these terms (more on this below)
  • Refunds - in cases where the loan charge no longer applies (as outlined in the first two bullet points), but you've already made voluntary payments as part of a settlement agreement, HMRC will refund you. However, HMRC says it will not be able to process any refunds until changes to the loan charge legislation have been enacted by parliament.

Draft legislation of these changes is due early this year.

HMRC has further guidance on its websiteand said it will write to any affected taxpayers to explain how the changes apply to them.

What do the changes mean for your 2018-19 tax return?

Anyone who had not yet agreed on a settlement with HMRC and may be subject to the loan charge must submit a 2018-19 tax return.

If you haven't yet filed your tax return, HMRC has said you can either:

  • file by the normal 31 January 2020 deadline, giving your best estimate of the tax due that takes the recent changes into account
  • file by 30 September 2020, with accurate figures of the tax due.

HMRC has confirmed that, in respect of the loan charge entries, all penalties will be waived for late filing, late payment and inaccuracies.

Late payment interest will also be waived between 1 February 2020 to 30 September 2020, on the condition that the return is filed and tax is either paid, or an arrangement with HMRC has been agreed, by 30 September 2020.

What if you've already completed your 2018-19 tax return?

If you've been organised and already submitted your tax return, these changes may affect the amount of tax you have to pay.

HMRC says you can amend your tax return up until 31 January 2021 to reflect the recent changes.

What if you can't pay your tax bill?

Despite the loan charge changes, many people will still face hefty tax bills this year.

If you don't have the means to pay, HMRC can set up a Time to Pay arrangement, which can break down or reduce your payments.

For those who don't have disposable assets (for example a second property, or other high-value items you don't 'need') and earn less than £50,000 a year, HMRC may agree to a payment arrangement over a minimum of five years; for those who earn less than £30,000 it will be a minimum of seven years.

To pay over a longer time period, you'll need to provide proof of your income and expenditure. HMRC says that people in this position will not pay more than 50% of their disposable income, unless they have a very high level of disposable income.

There is no set time limit for a Time to Pay agreement, and further guidance on these kinds of measures is due to be published soon.

For more help regarding the loan charge, HMRC has a loan charge helpline you can call 03000 599110, or you can email queries to ca.loancharge@hmrc.gov.uk.

Submit your 2018-19 tax return with Which?

For an easy-to-use, jargon-free way to file your tax return this year, try the Which? tax calculator.

You can tot up your tax bill, get tips on how to make savings and submit your return direct to HMRC with Which?.