In April 2019, a new form of legislation will be passed that will affect taxpayers dramatically. The April 2019 Loan Charge has been met with at best resentment, at worst indignation, as under the April 2019 loan charge, all loans made under previously disguised remuneration schemes will become subject to charges. So, read on for a complete guide on the April 2019 loan charge, and what it means for employees, employers and contractors.
We’ve created this guide to optimise your tax position ahead of the April 2019 Loan Charge to help provide a clear overview of what it means for the tax-paying individual facing the looming prospect of paying a loan charge – and subsequent tax charge – on a phantom income.
This makes things tricky for the taxpayer as well as the individual. If you have received an Accelerated Payment Notice (an APN), you are more likely to then receive a Follower Notice (FN), which can lead to HMRC opening up an investigation into your finances, going back years into your tax-paying history. Evidently, the loan charge is not the only aspect on which to focus.
April 2019 Loan Charge: What to Do Next
The April 2019 loan charge may have caught you with a nasty surprise, but there are steps you can take to make the process as pain-free as possible.
Following your receipt of an APN, your options are as follows:
- Discuss settling the loan with HMRC. One of the best ways to deal with tax issues of this kind is to explore the possibility of settlement. This is HMRC’s favoured direction as it means less hassle for them, and fewer resources spent trying to obtain the full amount from you.
- Pay off the loan in full
- Be prepared to pay the April 2019 loan charge
Of course, theoretically you have the choice to avoid paying and ignoring any letters you receive regarding the charge, but this is not advisable. Read on for more information on why this is not a good idea.
Settling Up Before Implementation of the April 2019 Loan Charge
General Information on Making A Settlement
Of course, it would be nice to get the inevitable over with and pay HMRC the full amount so you can get on with your life, however, finding the full sum can prove difficult for many of us, and it can often be easier to agree on a lower settlement amount for arrange to pay in stages through a payment plan.
The decision to make a settlement will likely be the easiest to arrange, as HMRC clearly prefers this payment option. It is reasonable, therefore, to think that they will struggle to obtain full payment on arrears after the April 2019 loan charge plan comes to pass- from HMRC’s perspective, this is a significant compromise. However, if you make a deal to pay a settlement amount, HMRC will ask you to make what is known as a ‘voluntary restitution’ to cover the remaining amount.
Do not that settling your debt with HMRC is the best way to ensure a finality to the proceedings, and avoid later problems such as home visits or Follower Notices. This will exempt you from the April 2019 loan charge.
The possibility of settling with HMRC prior to the April 2019 loan charge is made easier by recent adjustments to the settlement options with in remuneration schemes.
Reasons to Make A Settlement
You might ask: why settle? If you come to a settlement agreement with HMRC, this will effectively close all previous tax years. It will, therefore, exempt you from the April 2019 loan charge.
For many, this will seem like the time to start making calculations to work out whether the settlement amount is over or under your loan charge liability. This may turn out to be a fruitless pursuit, however, as even if you end up paying the eventual charge, HMRC may contest that you still owe other liabilities.
As seen in the dispute between HMRC and Rangers football team in 2017, the former can argue that all loans are subject to the rules of PAYE being made upfront, supplementary to the charge itself. Essentially, HMRC will always prefer taxpayers to avoid dispute and follow the course settlement, as this is the easiest and requires the least resources from government.
The Terms of Settlement
General Rules for Settlement
We’ve all heard HMRC’s age-old adage that you can’t make deals that are beneficial to you; you just have to pay. Despite this, there is a glint of light at the end of the tunnel for taxpayers who are liable under the April 2019 loan charge scheme.
This glint comes in the form of a few olive branches for making early settlement seem appealing. HMRC clearly want to avoid revisiting the Rangers debacle and the issues the loan charge will throw up in 2019. For those looking to settle, the same rules apply broadly to employees, employers and contractors alike. Those who have participated in the disguised remuneration schemes will now be liable for income tax and National Insurance Contribution (NIC) to be paid on all loans. You must also make ‘charitable donations’ (or ‘voluntary payments’ as HMRC likes to call them) for previous tax years that you may be liable for.
The deadline for organising a settlement with HMRC is 31st May 2018.
Settlement For Employees and Employers
The terms in relation to settling the loan for employees and employers are as follows. Both parties will have to pay income tax and NICS on all the loans made within the schemes. These payments are made for what is known as the ‘protected years’ which are determined by HMRC as the net scheme expenses.
The exact fee will be worked out based on the liabilities for the tax years in which these loans were executed. This provides a possible benefit for taxpayers as it potentially means the division of loans into yearly chunks. This could mean a base amount of money applies to each year, unlike with the April 2019 loan charge, which would put all the liabilities into one lump sum, forcing taxpayers into a higher band of tax although the money it is being based on is phantom income.
Settlement for Corporations
Regarding corporations, if their tax return is still open or within the window where it can be altered, they will be entitled to a reduction in tax, so their ‘contribution’ will be reduced. Promoter fees will also be subject to this deduction.
Interest will have to be paid by corporations on protected years, but the ‘voluntary’ (compulsory) restitution will not be subject to interest – thanks very much HMRC! While these deductions may be viewed as a glimmer of hope by corporations, other deductions are unlikely to be available unless further action is taken.
A Benefit-In-Kind (BIK) is paid by employees who enjoy extra perks and benefits on top of their salary. BIK payers who have received a loan will receive relief for their payments, although this will only apply to tax periods that are still open or stand within the overpayment relief bracket.
Anyone Will Do!
To save them the effort and resources of implementing further investigations into individual tax affairs, HMRC have decided to approach the resolution of tax disputes from a more liberal standpoint. Or, rather, there will be less approaching altogether. If an employee wishes to settle but their employer does not, they will have to make the necessary payments of income tax as well as any interest on late payment.
Fundamentally, HMRC want their money and are not concerned about who or where it comes from.
Settlement for Contractors
For contractors who have taken out loans applicable to the schemes in question, they must also pay all income tax and NICs due. These payments are made based on net receipt, i.e. contractors will be able to deduct fees paid from the total sum owed.
It might all sound a little ‘doom and gloom’ for those facing the April 2019 loan charge, but the possibility of deducing previous paid fees could mean a reduction of up to 18 percent for some users – another glint at the end of a very long tunnel. If you’re a contractor working under an employer, you won’t need to pay an NIC, but your employer may be called to account for any loans.
On the other hand, contractors who are self-employed – with a partner or otherwise – will be liable to pay NICs in both Class 2 and 4 for any loans, payments or other benefits and may be pursued by HMRC for the voluntary contribution payments previously mentioned.
What if You’re Taxed Twice?
It may happen that you accrue more than one liability for income tax or NIC based on the same revenue: you can be liable for double taxation on one income. This can happen for a few reasons, including on separate scheme contributions made before and after the imminent April 2019 loan charge.
However, thankfully there are provisions in place to prevent you getting taxed twice for one income. In the same way, the new legislation makes allowances for money in the APN process.
How to Repay Your Loan
General Information on Making a Loan Repayment
Everything else aside, the April 2019 loan charge puts users in a difficult position. Is it best to sort out loan repayment, or face the charges in April? Well, it sort of comes down to who you would prefer to pay back: your trustees or HMRC?
One way to think of it is that if you pay the money back to your trustees, you are more likely to benefit from this money in the future. You will have control over any future loans – taxable or otherwise. However, the funds can of course be utilised for other purposes, primarily for profitable gain in commercial ventures. The Inheritance Tax appeal of the funds is also preserved.
APN: A Tricky Business
If you have received an Accelerated Payment Notice from HMRC, this represents a problem that you will need to deal with swiftly. The best thing to do in this situation is accept that you need to make some sort of payment contribution, whether you’re at the centre of a serious tax review or if you’ve only just received the letter. Unless you have a technical exemption of some kind, you’re probably going to be required to pay HMRC some money.
Follower Notices: What You Should Know
For users who are going to suffer under the April 2019 loan charge, for many of you the tax review case involving the Rangers football team cannot be far from your thoughts. In this case, the ruling was that cash be collected without resorting to the loan charge. It’s a good idea not to rely too much on a similar ruling being made in your case, however. HMRC can issue you with a Follower Notice – your situation is different from that of the Rangers as this was a judicial hearing circumstance.
You will know by 5th July 2018 whether you’re receiving a Follower Notice or not, as this is 12 months after the loan charge was announced and after the time by which settlement must be arranged (31st May 2018).
If you do receive a Follower Notice, closed tax years will not be subject to the charge, making it potentially a better option than settlement, or the 20 years of retrospect in the April 2019 loan charge.
Lend me some money!
Based on the April 2019 loan charge legislation, the loan must be repaid in ‘money’. What I assume from this is that the loan needs to be repaid in ‘cash’. So what does that mean exactly? Well, in a nutshell if you do not have the ready cash available then you may end up having to sell assets in order to obtain capital. Alternatively, you may have to try and borrow money against those assets in order to get the cash. Once you have the money available again you can then pay the trustees back.
When do you now have to pay the charge?
You won’t be liable to pay the loan charge under the following circumstances:
- The charge is fully covered by an APN or Follower Notice
- The loan has already been settled or repaid
- An equal amount of tax has been paid via an alternative method on the same amount of income
If you do not fall into one of the above categories, the charge will come into play on all loan balances that are still outstanding and that have been accrued over the past two decades as at 5 April 2019. The April 2019 loan charge will be earned income and it will come under the 2018/2019 tax year.
Responsibility will, at first, be down to employers. That said, HMRC could decide to take action in order to get the money from the employee via a ‘transfer of liability’.
Don’t bury your head in the sand!
You may be considering burying your head in the sand and hoping it will all go away. Don’t even think about doing this as you will come off worse in the long run.
I have discussed these issues with a lot of people. From these discussion with people like contractors, many of whom will face real financial issues because of the loan charge, it become clear that some will try to ignore the issue and hope that it disappears. You may think that you can get away with it because nobody will ever find out. However, HMRC has its fingers on the pulse at all times so the chances are it will come to light at some point.
If you are part of a non-UK scheme, there is a chance that the tax office may impose serious penalties and could consider taking action as the result of an offshore tax evasion. What would this mean for you? Well, you could find yourself facing court proceedings in front of a magistrate and you could even find yourself facing a spell behind bars in addition to a hefty fine.
What happens next?
The first thing you should do is to try and get advice from someone with a thorough understanding of this legislation and issues that surround it.
You should avoid taking on an advisor that focuses on nothing other than settling cases with the tax office. Even if sorting out a settlement is the right step for you, there are various options open to you so don’t just go with the first company or advisor that tells you to settle and then does nothing more than call the tax office to advise that a cheque is on the post.
The same applies when it comes to making an arrangement to pay over a period of time – again, it is a solution but it is not the only option so don’t jump in feet first without looking into the other options.
If there is an APN
It seems that this has the least to offer when it comes to options. The chances are that it was issued a while ago and that any representation that was made failed – and there was no judicial review. Many people that are hit with an APN decide that they will try and settle it, often by way of a time to pay arrangement. If all disputed income is taken into account by the APN there should in theory be no additional tax to pay.
In the event that the option chosen is settlement, the employer, employee or contractor will have to advise the tax office by the end of May 2018 to let them know they intend to settle. Any additional documentation or information that the tax office then requests must be provided by the end of September 2018 so that a settlement can be sorted out by 5th April 2019.
If there is no APN
If there is no APN, the first thing to do is to try and work out what is owed under the settlement opportunity. If you have an accountant or tax advisor, they can help you to do this. You should also think about what the various options are. If you believe that settlement is the right step for you, there is still time to get in touch with HMRC to let them know as long as you do so within the specified time frames.
You may decide that you will just put up with the loan charge if it is not as crippling as you thought it might be. However, you must remember that if you do this you could still find yourself being hassled by HMRC with ongoing demands. If you do have the available money to repay, this may be the best option.
Bear in mind that if you do settle or you decide pay the charge, that money will go straight to the Treasury. However, if you repay the loan to the Trustees, it will be held in a usable trust. Of course, tax charges will be applicable if money is taken from the trust.
However, it does mean that the funds can be used in a more neutral manner than the Treasury. It is worth noting, however, that this could be more complicated in you are in a multi-participator scheme.
Just bear in mind that you could still find yourself facing the wrath of HMRC but the tax office will not be able to re-open cases from past years. There is also the option to challenge the APN based on the scheme being very different to Rangers – many may find that the terms of their schemes are entirely different.
So, making sure you understand the basics of the loan charge and the options surrounding it is very important, even if you have to seek advice from a tax professional with the necessary knowledge and expertise to help you. Call our tax experts today to discuss your circumstances. Every case is different and so the treatment. We are specialist accountants in tax avoidance and tax evasion including COP8 and COP9 Tax Investigations.