Briefing Note on ‘the Loan Charge’

In response to concerted pressure from MPs and lobby groups, and in fulfilment of a promise made by Boris Johnson to Parliament, the government has asked Sir Amyas Morse (former Head of the National Audit Office) to conduct a review, to be completed by November 2019, into whether the ‘Loan Charge’, “as it applies to individuals who have directly entered into disguised remuneration schemes, is an appropriate response to the tax avoidance behaviour in question”. To understand what this is all about, read on….

  1. Many relatively low-paid employees and contractors have been lured into providing their personal services to clients, including government departments, on the basis that, each year, the individual worker would receive minimum wage payments, subject to income tax and NICs under PAYE, and the balance of the consideration for their services being made up of loans – typically advanced by the trustees of an offshore trust funded directly or indirectly by the client . The loans were generally represented to be ‘open-ended’, that is, there was no expectation that the worker would be required to repay the loan for many years, if at all. (Broadly, it was anticipated that the loan would be released, free of tax, after the worker’s death.) The loan element was – so it was represented – not “earnings”, and therefore not subject to deduction of income tax and NICs under PAYE.
  2. Such arrangements were widely promoted by accountants and other tax advisers in the period from c 1993 until (at least) 2010. They were adopted by a wide range of employers/engagers, both small and large, including government departments.
  3. In many cases the legitimacy of the arrangement was represented by promoters and advisers to be in reliance upon the written Opinions of well-known Q.C.s. Whilst never formally ‘approving’ such arrangements, HMRC were slow to challenge them or respond to disclosures of their intended use or open enquiries into returns which made full disclosure of them.
  4. The practice of having third-party trustees make such loans to employees and directors was effectively stopped when, in 2011, the ‘disguised remuneration’ rules (in Part 7A, ITEPA 2003) were introduced. It is understood that Ministers insisted that this legislation be framed as imposing a charge on individual employees, rather than as a levy on the employer funding the arrangement. Similar rules relating to workers who were not employees or directors took effect from 6 April 2017.
  5. In 2017, the Supreme Court (in the “Glasgow Rangers” case) ultimately held that payments for or in respect of an employee’s services which are re-directed with the consent or acquiescence of the employee to a third party (such as trustees) nevertheless fall to be taxed as payments of earnings subject to deduction of tax and NICs under PAYE.
  6. The disguised remuneration rules did not, of themselves, bring into charge to income tax the benefit enjoyed by employees and workers of having existing pre-2011 loans remain outstanding, and employers/clients, and individual taxpayers, were showing an obvious reluctance to come forward and agree settlements with HMRC, accepting that the amounts outstanding were properly to be taxed as earnings or profits of a trade.
  7. Accordingly, the government introduced a ‘one-off’ charge to income tax (and NICs) on (broadly) the aggregate amount of loans outstanding as at 5 April 2019 (“the Loan Charge”). The charge applies to all loans made as far back as 1999 in circumstances which, if such a loan was now made, would fall within the scope of the ‘disguised remuneration’ charges introduced in relation to employees and directors, in 2011 and, for certain other workers and close company participants, in 2017.
  8. Criticism of the Loan Charge has been voiced on the basis that:

(a) It is perceived as ‘retrospective’ in effect, as it applies to loan arrangements made as far back as 1999.

However, the charge is levied on the current, ongoing, benefit to an individual of the lender failing to call for repayment of the loan, that being a benefit which accrues daily for so long as it remains unpaid. The charge did not apply in relation to a loan if it had been repaid in cash before 6 April 2019.

(b) The Loan Charge imposes an immediate charge to income tax (and NICs), on a single occasion, on amounts which represent the aggregation of income accrued over up to 20 years. A reporting obligation must be satisfied by 30 September. The tax, if not accounted for under PAYE, must be accounted for by self-assessment, with the deadline for submission of SA Returns being 31st January 2020 (and an earlier deadline of 5 October for paper returns).

Whilst HMRC has offered deferred payment terms to those individuals with gross annual earnings of less than £50,000, the burden on many individuals to fund the tax is very substantial and it has been reported that, in extreme cases, individual taxpayers have been driven to suicide as a consequence.

(c) In most cases, the burden of the charge falls on the individual, rather than upon the employer or client who, typically, stood to benefit from the arrangement as it meant that the net cost of the arrangement was reduced below that of paying earnings in cash, principally because of the saving of employers’ 13.8 % NICs.

Whilst extant employers are primarily liable to account for tax under the Loan Charge, in the case of those which have ceased to exist, or are no longer the PAYE employer, HMRC is exercising power to recover the tax directly from the individual.

(d) In reality, many individual participants benefitted only marginally, in terms of net ‘cash in hand’, as much of the perceived ‘savings’ were taken by the promoters/advisers in fees. Many lower-paid employees and contractors had little or no choice as to whether to participate in such arrangements as the employer/intermediary/client made such participation a condition of securing the paid employment/engagement.

(e) So far as many individual participants were concerned, it was represented to them that such arrangements were ‘legitimate’ and ‘acceptable’ to HMRC, and this understanding was reinforced by the fact that HMRC did not in fact challenge such arrangements even when the full circumstances were disclosed to them, either by way of formal ‘up-front’ ‘disclosures [by the promoters] of a tax avoidance scheme’, or in response to enquiries opened into an individual’s self-assessment return.

(f) Those who in fact gained most from such arrangements (as implemented in relation to relatively low-paid workers), namely the promoters and advisers, have effectively avoided sanctions. It is not possible, under existing laws, for HMRC to secure recovery, from the promoter/adviser, of the tax now due from an individual participant.

(g) Whilst HMRC has, until recently, offered, to both employers and individuals, ‘settlement opportunities’ which would allow an individual to avoid the Loan Charge by the employer or employee agreeing to account for tax on the loans as if they were earnings of the relevant years, the tactics used by HMRC to ‘persuade’ taxpayers – particularly individuals – to reach settlement agreements have been strongly criticised as “strong-armed”.


David Pett, Temple Tax Chambers                                                            11 September 2019

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s