The Financial Secretary to the Treasury (Jesse Norman)
In September 2019, the Government commissioned Sir Amyas Morse to lead the independent loan charge review. The loan charge is designed to tackle disguised remuneration avoidance schemes where a person’s income is paid as a loan which is not repaid. The Government are today publishing the review and the Government’s own response to the review. The review, Government response and accompanying documents may be found on gov.uk:
https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review
The Government are grateful to Sir Amyas and his team for all their work on the review.
The Government welcome Sir Amyas’ recognition that disguised remuneration schemes are a form of tax avoidance. Sir Amyas sets out the action that the Government took to try to tackle disguised remuneration and concludes that the Government were right to take action to ensure the tax was collected.
However, the Government recognise the concerns raised in the review about the impact of some aspects of the loan charge. To address these concerns, they are accepting all but one of the recommendations made in the review.
Loan charge design changes
The Government are today announcing the following design changes to the loan charge:
the loan charge will be limited to loans taken out on or after 9 December 2010—the date on which targeted anti-avoidance legislation was announced which put the tax position of disguised remuneration avoidance schemes beyond doubt, according to Sir Amyas;
loans taken out between 9 December 2010 and 5 April 2016 (inclusive) will remain within the scope of the loan charge unless the user of the scheme can prove they disclosed details of their scheme use as specified by the review on their tax return, and HMRC failed to take action to protect their position, for example, by opening an enquiry;
taxpayers affected by the loan charge will be allowed to report their loan charge balance across three tax years, rather than one tax year.
The changes above will be legislated for in the forthcoming Finance Bill and will be made effective from today using the HMRC Commissioners’ powers of collection and management.
For taxpayers who have already settled their disguised remuneration liabilities since the loan charge was announced in March 2016, new legislation will enable HMRC to repay tax paid for years that would be no longer subject to the loan charge because the year was unprotected (for example, HMRC had not opened an enquiry or issued an assessment). The Government will announce further details of this legislation in due course.
The Government will also review future policy on interest rates within the tax system and will report the results to Parliament by 31 July 2020.
While loans made before 9 December 2010 are removed from the scope of the charge, the underlying tax liability for loans made prior to this date remains. HMRC will pursue those liabilities through open enquiries and assessments, and where necessary through litigation. HMRC will publish updated settlement terms for individuals in this position in due course. The Government will also invest in a new HMRC team to carry out this activity and to ensure that people who entered into disguised remuneration avoidance schemes before 9 December 2010 still pay the tax due and make their contribution to funding public services. The Government will announce further details at Budget.
Loans taken out after 5 April 2016 and outstanding as of 5 April 2019 also remain within the scope of the loan charge. Loans taken out after 5 April 2019 are taxable when they are received under legislation introduced in Finance Act 2011.
Additional flexibility for taxpayers affected by the loan charge
The loan charge remains in force and any relevant outstanding loan balance should be included in the self-assessment tax return for 2018-19. However, the Government recognise that taxpayers will need sufficient time to understand their position in light of the changes above. HMRC have published guidance today on the action which affected taxpayers can take and the flexibility they now have in relation to the 31 January 2020 self-assessment deadline.
Taxpayers who have not settled their disguised remuneration tax affairs by 31 January 2020 are required to submit a self-assessment return for the 2018-19 tax year. They can do this by the 31 January statutory 2020 filing date, giving their best estimate of their outstanding loan balance, or they can defer sending their return until 30 September 2020. In these circumstances HMRC will waive any penalties for late filing or late payment, and not charge any penalties for inaccurate returns (if the inaccuracy relates to the loan charge), as long as the taxpayer has submitted their return, or amends it with accurate figures by 30 September 2020.
For taxpayers within the scope of the loan charge, no interest will be charged on amounts falling due at 31 January 2020 as long as the tax is paid, or an arrangement made with HMRC to do so, by 30 September 2020.
Paying the loan charge
The tax system already has safeguards in place designed to ensure that taxpayers who are not able to pay tax when it falls due are not required to take on unmanageable payment terms These safeguards include time-to-pay arrangements which ensure that the taxpayer only pays what they can, when they can. HMRC have also announced previously that no taxpayer will be forced to sell their main home to fund a disguised remuneration or loan charge tax bill, and HMRC already signpost specialist debt advisers and charities for those taxpayers struggling with debt.
In addition to these existing arrangements, the Government and HMRC are today announcing that:
the Government will fund an external body to provide independent advice on time-to-pay arrangements, including on the suitability of individual voluntary arrangements for taxpayers;
in line with current practice, time-to-pay arrangements will not require payment of more than 50% of disposable income, aside from where taxpayers have very high disposable incomes; and
where a taxpayer has no disposable assets and earns less than £50,000, then they will be automatically entitled to a minimum of a five-year payment plan, and where they earn less than £30,000, a minimum of seven years.
HMRC will also implement a number of changes to ensure individuals who cannot pay the tax due and who are in need of bespoke arrangements to pay their tax debts understand the options available to them, and can make an informed decision about how to proceed. HMRC today announce that they will:
publish the income and expenditure form that HMRC use with taxpayers to understand assets, income, and expenditure, and work out disposable income, and how HMRC use that to create time-to-pay arrangements; and
refer taxpayers to a debt advice charity where their finances suggest they need time to pay in excess of five years.
HMRC can also confirm that, in line with current practice, they will:
guarantee time-to-pay arrangements wherever an affordability assessment shows an individual cannot pay in full;
accept single financial statements completed by the taxpayer with a debt advice charity as proof of affordability;
stop all recovery action where the taxpayer has no ability to pay, until there is a significant change of circumstance; and
not seek bankruptcy proceedings for individuals who have engaged with HMRC, completed an affordability assessment, and are solely unable to pay the loan charge.
The policy changes to the loan charge and to time-to-pay set out above will have a significant impact on the affordability of the loan charge for many taxpayers affected. Allowing some loan charge liability to be written off in addition to these changes would have the effect of treating these tax avoiders more favourably than other individuals with HMRC debts (including tax credit claimants), would reduce taxpayers’ incentive to pay off the debt, and would have unwelcome wider impacts that change how HMRC and those in debt interact. The Government are therefore not accepting the review’s recommendation to introduce a write-off of tax due on the loan charge after 10 years for individuals whose time-to-pay arrangement is longer than 10 years.
Future approach to tackling disguised remuneration avoidance schemes
Disguised remuneration avoidance schemes do not work in law and income paid through these schemes is fully taxable. The Government remain committed to tackling large scale avoidance of this nature. The Government share the review’s concern that these schemes continue to be marketed and used; this year alone, around 8,000 people are using a disguised remuneration scheme with around 3,000 of them being new users. Tackling large-scale avoidance of this nature remains challenging and further consideration is required to determine what additional changes are needed. The Government will announce further action at the Budget.
The Government and HMRC strongly encourage people not to use these schemes and to get in touch with HMRC if they think they are being sold a scheme.
The Government and HMRC are determined to continue to tackle promoters of tax avoidance schemes, and can today announce that HMRC will:
introduce further measures to tackle promoters of avoidance schemes and reduce the scope for promoters to market tax avoidance schemes—details of which will be set out at Budget;
launch a call for evidence on what steps it can take to raise standards in the market for tax advice to give taxpayers more assurance that the advice they are receiving is reliable; and
will seek to provide targeted early communication to taxpayers who they suspect may be engaging in tax avoidance to encourage them to stop.
Communications and engagement
The Government and HMRC also accept recommendations in the review that will improve the information provided in Government impact notes of tax changes and ensure that they learn from the experience of the loan charge in communicating policy and communicating with taxpayers.
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