R3 Technical Alert - Disguised Remuneration Loan Charge

January 6, 2020

The January 2020 update from R3 interestingly talks about the September 2019 review into the Disguised Remuneration Loan Charge, the content is shared below, for informational purposes ….

R3 Technical Alert dated 6 January 2020 reads…

Disguised Remuneration Loan Charge – Part III

GOVERNMENT RESPONSE TO THE INDEPENDENT LOAN CHARGE REVIEW

In September 2019, the Government commissioned an independent Loan Charge (‘LC’) review to be undertaken. The review was published on 20 December 2019 together with the Government’s own response to the review.

The published review and guidance notes can be found on the Gov.uk website here here.

HIGHLIGHTS OF THE REVIEW

  • Disguised Remuneration (‘DR’) Schemes are a form of tax avoidance and the Government was right to take action to ensure the tax was collected;

  • The use of these schemes is unfair to the vast majority of the taxpaying population who do not engage in tax avoidance; 99.8% of taxpayers have never used one of these schemes;

  • The Government recognises the concerns raised by the Review about the impact of some aspects of the LC;

  • The review raises concerns about the affordability of the LC. The Government recognises the LC can involve large payments for taxpayers;

  • HMRC is sorry some people who used DR avoidance schemes experience delays and a fragmented experience from different parts of HMRC. HMRC will go further in engaging with users early and tackling the whole supply chain for tax avoidance;

  • 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 LC in communicating policy and communicating with taxpayers;

  • The Government recognises the concerns raised in the Review about the impact of some aspects of the LC. To address these concerns, it is accepting all but one of the recommendations made in the Review.

CHANGES TO THE LC

The following changes will be legislated for in the forthcoming Finance Bill and were made effective from 20 December 2019 using the HMRC Commissioners’ powers of collection and management.

  • The LC 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 DR avoidance schemes beyond doubt;

  • Loans taken out between 9 December 2010 and 5 April 2016 (inclusive) will remain within the scope of the LC 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 LC will be allowed to report their LC balance across three tax years, rather than one tax year. According to HMRC, individuals can now elect to spread the amount of their outstanding loan balance (as at 5 April 2019, recalculated in line with the above changes) evenly across 3 tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021. This will give greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of tax.

For taxpayers who have already settled their DR liabilities since the LC was announced in March 2016, new legislation will enable HMRC to repay tax paid for years that would be no longer subject to the LC 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. HMRC will not be able to process any refunds until changes to the loan charge legislation have been enacted by Parliament.

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 DR 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 LC. Loans taken out after 5 April 2019 are taxable when they are received under legislation introduced in Finance Act 2011.

OTHER KEY ASPECTS TAKEN FROM REVIEW

- Additional flexibility for taxpayers affected by the LC

The LC remains in force and any relevant outstanding loan balance should be included in the Self Assessment tax return for 2018/19. However, the Government recognises that taxpayers will need enough time to understand their position considering the changes above. HMRC have published guidance 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 DR 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 LC), 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 LC, 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 LC

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 DR or LC 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 have announced 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 have announced 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 5 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 LC.

The policy changes to the LC and to Time to Pay set out above will have a significant impact on the affordability of the LC for many taxpayers affected. Allowing some LC 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 is therefore not accepting the Review’s recommendation to introduce a write-off of tax due on the LC after 10 years for individuals whose Time to Pay arrangement is longer than 10 years.

- Future approach to tackling DR avoidance schemes

DR avoidance schemes do not work in law and income paid through these schemes is fully taxable. The Government remains committed to tackling large scale avoidance of this nature. The Government shares the Review’s concern that these schemes continue to be marketed and used; this year alone, around 8,000 people are using a DR 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 have announced 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.

IMPACT OF INSOLVENCY PRACTITIONERS

Insolvency practitioners should continue to notify HMRC of any EBT schemes which they are aware of or become aware of. The employer will be required to report the loan amount (and related information) to HMRC via the Real Time Information System.

As previously advised, HMRC had informed R3 that they would not enter into direct agreements with individuals where the company was subject to insolvency proceedings, without informing the office holder and seeking to include them in the negotiations. We understand however that HMRC Policy team have advised that HMRC are unable to act in this way where individuals approach them directly for settlement negotiations and therefore members should be aware of this change in stance and be mindful that the individual may have entered into settlement terms directly with HMRC.

R3 Technical Alert ends