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Following the publication of Sir Amyas Morse’s independent review conclusion in December 2019 and the Government’s acceptance of all-but-one of the recommendations, the key changes to the Loan Charge legislation have now been drafted into legislation.
Whilst the changes are overwhelmingly positive for individuals that are now provided full relief from the Loan Charge, the changes prompt additional considerations for individuals with more complex affairs and those that have taken certain actions.
The draft legislation published on 20 January 2020 sets out the key changes, which are;
The Loan charge will now only apply to outstanding loans (and similar arrangements) made on, or after, 9 December 2010. Previously, the Loan Charge sought to apply to loans made on or after 6 April 1999.
Despite pre-2010 loans now not being subject to the Loan Charge, this does not preclude HMRC recouping tax on these loans if the year is ‘protected’ by HMRC holding an open enquiry into the relevant year, or if assessments have been issued.
The Loan Charge will not apply to loans made years before 6 April 2016 where a reasonable disclosure of the use of a disguised remuneration scheme was made within the relevant tax return, and HMRC did not “take steps” to recover the tax (such as by opening an enquiry).
The definition of ‘reasonable disclosure’ has been provided in the draft legislation as follows;
‘a person’s tax return or accompanying documents must have identified that loan and the person to whom it was made, the arrangements under which the loan was made, and such other information as necessary for it to be apparent that a reasonable case could have been made that the person was chargeable to income tax on the amount of the loan’.
As clarity has now been provided on what constitutes reasonable disclosure, it is important to carefully review the relevant tax returns throughout 2010 to 2016 to consider if reasonable disclosure was made at the appropriate time.
If a liability under the Loan Charge does arise, it is now possible to make an election to spread payment evenly over three years, being the years ended 5th April 2019, 2020 and 2021. This allows greater flexibility as to when the outstanding loan balance is subject to income tax and for some, this will ensure that exposure to higher rates of tax is minimised.
Taxpayers subject to the loan charge have now also been given a generous six-month extension to the payment deadline for their 2018/19 tax liability.
As long as 2018/19’s tax return is filed and the tax paid, or a payment arrangement is agreed with HMRC by 30 September 2020, HMRC will not charge late payment interest for this period.
The government has confirmed its committed to refunding voluntary payments that were made in order to avoid the application of the Loan Charge. The current draft legislation does not provide further detail on the mechanisms to allow these refunds; however, further draft legislation will be published together with guidance before the 2020 Finance Bill.
Whilst the changes are overwhelmingly positive, there are a number of knock-on issues that require further clarification from HMRC.
Many individuals have taken positive action in order to avoid the Loan Charge applying to their arrangements. For example, some individuals have repaid or written-off loans that would otherwise have remained outstanding, or have wound up the relevant Trust/s, bringing forward Inheritance Tax charges.
We do not know if the Government will simply disregard subsequent steps that have been taken where an additional tax charge may arise. We would hope that concessions would be made to ensure that no individual suffers a detriment from these changes and expect that these queries will be addressed by HMRC in the publication of future guidance.
How can Simmons Gainsford help?
We are able to undertake a review of your specific circumstances and advise on the impact of these new changes. We will also continue to publish further updates once more guidance is available from HMRC.
In the meantime, should you require assistance with reviewing the impact of these changes please do not hesitate to contact Anthony Rose in this regard on Anthony.firstname.lastname@example.org or telephone 020 7447 9000
Anthony Rose has been involved in negotiating EBT settlement cases with HMRC for 10 years and has worked on a wide variety of complex cases including those where the original employer company is in liquidation.