A surprising number of people have an exaggerated idea of the powers HMRC can use for the collection of tax...
While many of the individuals who have recently been through the process of submitting their self assessment tax returns might be breathing a sigh of relief that the job’s done for another year. Others might be casting a wary eye to the future and to the implications of the 2019 Loan Charge from HMRC.
What is the 2019 Loan Charge and what do I need to know?
The UK tax system is vast and complex. Within decades of compounded tax legislation, there are bound to be numerous contradictions and unintended consequences as various rules interact with one another. This can create loopholes which, if found and exploited can be used to allow those who make use of them to pay less tax than they otherwise would. This is the essence of tax avoidance, which is legal as opposed to tax evasion which is illegal.
The 2019 Loan Charge has been introduced by HMRC for the purpose of recovering unpaid taxes from one particular type of tax avoidance scheme involving loans, which they’ve declared to be unworkable due to it being considered disguised remuneration.
What Tax Avoidance Schemes Might Be Affected By The 2019 Loan Charge?
The type of tax avoidance schemes being targeted by the 2019 loan charge quite often involve contractors and personal service companies whose remuneration was split and paid as two separate types of transaction. The first part of the transaction involved the contractor or PSC being paid at, or just above minimum wage which is typically below the threshold for income tax and National Insurance. The remainder of their pay for the work they did was remitted in the form of a payment which was recorded as an interest free loan.This loan, which while technically repayable, would never be repaid and allowed the recipient to receive money without normal income tax or NIC contributions being made.
What’s the controversy surrounding the April 2019 Loan Charge?
The practice of using such methods to take a substantial portion of income out of tax was declared unworkable by HMRC in 2011. However, that didn’t stop those providing these tax avoidance products from finding ways around the rules and they continued to market them after making some changes to the terms and conditions.
When HMRC declares a tax avoidance scheme to be unworkable, they have (since 2014) been given the option of using an Accelerated Payment Notice to require that those taking part in the scheme to pay back the tax they’d saved straight away. Recipients can appeal against that decision but they must pay first and argue later, thereby removing the cashflow advantage for drawing the appeal out over time.
If HMRC has declared one particular scheme to be unworkable, they can also demand immediate payment of tax saved using schemes which are substantially similar.
The controversy with the April 2019 Loan charge is twofold. Firstly, that HMRC are declaring as disguised remuneration, payments that weren’t disguised at all because users of legal tax avoidance schemes are required to declare them (DOTAS) as part of the statutory filing of their accounts.
Secondly and, for some, more worryingly, HMRC are pursuing the tax that was withheld retrospectively and are going back through previously used schemes as far back as April 1999. The name ‘April 2019 Loan charge’ refers to the deadline for those involved in such schemes to contact HMRC and make arrangements to pay or offer a settlement.
I’m Affected by the 2019 Loan Charge, What Can I do?
For those affected by the loan charge, their primary consideration is likely to be the cashflow implications of potentially being required to pay up to 20 years of the tax previously saved on such schemes. It goes without saying that many could be instantly pushed into insolvency.
If you’re worried about the hardship which the April Loan Charge might subject you to, we offer a free consultation for both businesses and individuals, to contact us, discuss your challenges and we can then point you in the right direction for what to do next.
Speak to us, we can help.