Following most of the recommendations of Sir Amyas Morse in his report, issued on 20th December 2019, on the policy behind the Loan Charge and its implementation, the government immediately announced changes to the Loan Charge and its enforcement, some of which require legislation to be included in the Finance Act 2020.
- Reduction in scope of the Loan Charge.
The principle change is that the Loan Charge will not apply to (a) loans made before 9 December 2010 or (b) to any loans made before 6 April 2016 if the scheme was fully disclosed to HMRC but they did not open an enquiry or raise an assessment.
However, this does not mean that liability for a general earnings charge on ‘re-directed earnings’ in the form of contributions to a trust used to fund the loans is being set aside. It was made clear that HMRC will continue to pursue such liabilities to income tax and NICs through open enquiries and discovery assessments and, as necessary, litigation. The HM Treasury paper issued in response to the Loan Charge Review indicated (at 2.9 and 2.12) that HMRC would publish updated settlement terms for all taxpayers in this position. Guidance published by HMRC on 20th December by HMRC states that, in the case of those who made full disclosure by 5 April 2019 and are in settlement negotiations:
- if the position is unaffected by the changes, settlement may be finalised in the normal way;
- otherwise, HMRC will re-calculate settlement terms if either: (a) they relate to any loans made before 9 December 2010 (but presumably only if the relevant year(s) in which contributions were made are ‘unprotected’ so that HMRC is out of time to recover the tax) or (b) they relate to loans made before 6 April 2016 and the use of the loan scheme was fully disclosed to HMRC but they took no action to open an enquiry.
In these cases, the taxpayer may choose to settle (presumably under the 2017 settlement terms, subject to any changes to be announced) all years up to and including 2015/16 if there is an open enquiry or assessment, and any tax due for 2016/17 and later years, whether or not there is an open enquiry or assessment. A choice is offered: a taxpayer may instead settle only those years to which the Loan Charge still applies (so as to prevent it applying). In this event, the tax covered by any open enquiry or assessment will need to be finalised in due course by separate settlement or litigation.
So far as the self-assessment return due on 31 January 2020 was concerned, this can be submitted either:
(a) by that date with a best estimate of the balance outstanding on loans to which the Loan Charge applies (i.e. loans made on or after 9 December 2010 or before 6 April 2016 if, but only if, the scheme was fully disclosed to HMRC and no enquiry was opened). This estimate can be amended up to 30 September 2020 without penalty – and, if settlement is reached before then, the estimate can be reduced to nil. Tax due on the Loan Charge (only) may be ‘stood over’ until that date.
(b) submit the 2018/19 SAR by 30 September 2020. Provided that a ‘time to pay’ arrangement is agreed by then any late filing or late payment penalties will be waived. Again, if settlement is reached by then, there will be no Loan Charge to report.
In the case of returns filed after 30 September 2020, HMRC would consider waiving late filing and late payment fees on a case-by-case basis. Likewise, decisions on whether to charge inaccuracy penalties would be made on a similar basis.
- What of those who have already settled?
HMRC will refund voluntary restitution payments (i.e. amounts on which no late payment interest has been charged) made under settlements reached since March 2016 if the Loan Charge no longer applies either because the loan was pre-9 December 2010 or pre-6 April 2016 and, although fully disclosed, no action was taken by HMRC (e.g. by opening an enquiry). Refunds cannot be made until legislation has been enacted. Clearly there will be additional complexity if the settlement included other taxes such as inheritance tax. How this interaction with other taxes will be dealt with has yet to be determined, HMRC simply stating at this stage that details will be published in 2020 (not “early 2020”).
Those already paying off settled liabilities under a payment plan should continue to do so and await contact from HMRC after the necessary legislation is passed.
- Spreading the cost of paying the Loan Charge over 3 years
This recommendation was accepted and will presumably be legislated for in 2020. It is estimated that about 21,000 individuals could be affected by this.
- Recovery of the tax due
The government has accepted the recommendation that individuals subject to the Loan Charge (as distinct form any earlier ‘re-directed earnings’ or other disguised remuneration charge) should only be asked to pay up to half their disposable income each year and a reasonable proportion of their liquid assets. No one should be put in the position of having to sell their home or use their existing pension pot to pay the loan charge.
The government did not accept the recommendation that those individual taxpayers with income of less than £30,000 in 2017-18 should be released from liability to pay any balance remaining unpaid after 10 years as this would, it was said, treat tax avoiders more favourably than other individuals with tax debts and reduces the incentive to pay off the debt.
The government partially accepted the recommendation that individuals with income in 2017-18 of between £30,000 and £50,000 should be offered the same payment terms as those who opted to settle rather than pay the Loan Charge. Only if they have no disposable assets will taxpayers earning less then £50,000 be automatically entitled to a minimum 5-year payment plan or, if less than £30,000, a minimum 7-year plan.
- Other recommendations
The government has accepted, or partially accepted a number of other recommendations made by Sir Amyas, including:
- that the government review future policy on interest rates within the tax system and report by 31 July 2020;
- that HMRC fund an external body to provide independent advice to lower income taxpayers on debt management.
HMRC has already announced that it will publish the Income & Expenditure form used to work out disposable income and how it is used to create ‘time to pay’ arrangements, and that it will refer taxpayers to a debt advice charity if evidence suggests they need time to pay in excess of 5 years. It will also accept Single Financial statements completed by an individual with a debt charity as proof of affordability; stop, until a significant change in circumstances, recovery action if there is no ability to pay; and not seek to bankrupt those who have engaged with HMRC and are solely unable to pay the loan Charge.
- that HMRC must communicate regularly with those who have open enquiries; report to Parliament on its implementation of the changes to the loan charge; improve staff training and set higher expectations of performance during interactions with the public.
- Proposals to further tackle tax avoidance
The government will announce in the 2020 Budget further action to tackle large scale tax avoidance involving disguised remuneration. To reduce the scope for the marketing of tax avoidance schemes, the government will:
- ensure that HMRC can more effectively issue stop notices to promoters of schemes that do not work;
- Prevent avoidance of obligations under the Promoters of Tax Avoidance Scheme (“POTAS”) rules by using corporate entity structures;
- Ensure HMRC can obtain information as soon as an abusive scheme is identified and that enabler penalties bite immediately a scheme has been defeated at tribunal;
- Ensure that HMRC can take decisive action if promoters fail to provide information; and
- Make further changes to the POTAS regime to ensure it operates effectively and that the GAAR can be used to counteract partnerships as intended.
More generally, HMRC communication must be improved. For example, PAYE RTI information should be used to enable communication with taxpayers suspected of engaging in tax avoidance.
Further details will be given in the 2020 Budget.
- Inheritance tax charges associated with EBT loan schemes
No announcement has been made about any changes to HMRC’s current approach of seeking ‘10-yearly’ and/or ‘exit’ charges to inheritance tax, if appropriate, when a discretionary trust has been used. The suggestion, mentioned at 2 above, of further details of the interaction with other taxes being published at some point in 2020 gives rise to the hope that a more pragmatic approach will be taken and that there might be substantive changes to the inheritance tax regime as it applies to trusts used solely to provide taxable loans.
 Reference is made elsewhere to further guidance and draft legislation being published in early 2020.