Loan Charge Reporting Requirements – Navigating the Minefield
You will no doubt be aware the loan charge is upon us, and this article highlights what you need to know.
UPDATE: Since this article was written, Boris Johnson has announced a review into the government’s controversial loan charge following sustained pressure from campaigners, MPs and the House of Lords. As a result, proposed dates and/or details below may change accordingly.
What Is It All About?
An estimated 50,000 workers, mostly contractors, were paid by way of a modest salary, topped up with a loan, as a way to reduce their income tax and national insurance contributions.
Although this has been described as a ‘loan’, in reality the amounts advanced were never intended to be repaid.
HMRC maintains it never approved these schemes, asserting that they do not work, and referring to such loan schemes as ‘disguised remuneration’.
2019 Loan Charge
Effective from April 2019, the tax department, supported by the UK government, introduced a charge (loan charge) on unrepaid loans that contractors received instead of salaried payments.
This loan charge combines all outstanding loans accrued over the course of up to 20 years and taxes them as income in one year.
Those affected will have to pay by the end of January 2020.
A UK Based Employer
UK based employers were required to declared outstanding loan amounts by April 15th, 2019 at the latest, via their RTI returns, with all associated income tax, national insurance and student loan repayment amounts paid to HMRC by April 22nd .
Subsequently, assuming the employer operated the scheme in the first place, the employee must ‘make good’ (reimburse) the tax and national insurance to their employer by July 5th, 2019.
Failure to make good will give rise to a taxable benefit in kind, reportable as part of the 2018/19 P11D return.
It is immediately apparent that most those affected would rather incur a P11D benefit charge than repay the amount in full to their employers.
There are two instances where great care is needed:
- Where not all of the tax has been made good to the employer
The way that the legislation is written (ITEPA 2003 s.222) is as an ‘all or nothing’ scenario. This means an employee who pays back some or most, but not all of their liability will face a P11D tax liability on the full amount paid by the employer.
- Where the employer cannot afford to pay
Under Reg 81(4) of the PAYE regulations, the tax liability could get transferred to the employee, where the employer is unable to pay.
While an employee ends up paying all the tax themselves, they still incur an ITEPA 2003 s222 charge.
HMRC maintains that, provided they were advised by July 4th, 2019 that an employee wished to pay the loan charge tax to them rather than to their employer, they would not seek to apply the ITEPA 2003 s222 charge.
Furthermore, the department promised to refund anything the employer had previously paid over.
In the event of an employer either being situated abroad or no longer in existence, beneficiaries of the loan scheme must report any outstanding loans to HMRC by September 30th 2019.
To help, HMRC has established an online process supported by a paper form for those who are less tech-savvy.
Failure to report the details for all outstanding loans by September 30th 2019 may render a person liable to penalties. However, it is anticipated they will only be charged in the most severe cases.
Individuals must also report their outstanding loans as part of the 2018/19 self-assessment tax return filing process. The amount of the outstanding loans should be disclosed in box 21, located under the ‘Disguised Remuneration’ section of form SA101 ‘Self-assessment: additional information’.
Do not forget that where an affected person has not previously been required to file a self-assessment tax return, the standard section 7 (Taxes Management Act 1970) requirement to notify chargeability by October 5th following the end of the tax year concerned applies.
Remember also that the loan charge is a one-off charge. Therefore, a claim to reduce future payments on account may be in point
The basic process for dealing with trade-based schemes is similar to the employee scenario.
Where individuals are still trading, they should include outstanding loan amounts from trade-based schemes in box 75.1 under the ‘Disguised Remuneration Additions To Profits’ section of the self-employed supplementary pages (SA103 (full)) of their self-assessment tax return.
For those whose trading activity ceased before 2018/19, they should complete boxes 22 to 24 of form SA101 as appropriate.
Those in trade-based schemes will need to elect for any APNs (accelerated payment notices) to be set against the loan charge liability. At the time of writing, further HMRC guidance on the offsetting of APN’s is expected in due course.
Difficulty in Paying
Anyone who believes they will have difficulty paying the resultant tax must still complete and submit a tax return. They will otherwise be liable for failure to notify and subject to late filing penalties in addition to the loan charge.
Once the self-assessment tax return has been filed, and HMRC is aware of the extent of any loan charge debt, the department should be contacted to agree on a manageable payment plan. Their agreement will depend on an individual’s circumstances, and there is no upper time limit on how long payments can potentially be spread.
If things are left until after the January 31st, 2020 payment deadline, individuals may have to consult with HMRC’s debt management team directly about next steps.