As per the finance act (No 2) 2017, government introduced certain measures to tackle with disguised remuneration loan schemes known as 2019 Loan charge. This charge is levied on the non-taxable loans given by the employer to the employees by paying amount into employee benefit trust. Employer receives a tax deduction on the basis of funds paid out to employees which left outstanding.
The loan charge is not applicable only to Employee benefit trusts. HMRC can investigate and apply this charge to any third party loan which has been established with the intention of benefitting an employee and which was entered into these schemes on or after 6th April 1999. The due date for paying charge on the outstanding loan is 5th April 2019. This grants HMRC license to take loan charges and to punish contractors for loan agreements since 1999.
What are The Schemes Affected in Relation To 2019 Loan Charge?
The schemes which are affected in relation to 2019 loan charge are as follows –
- Contractor Loan schemes
- Employee benefit Trusts (EBT’s)
- Employer financed retirement benefit schemes (EFRBS) etc.
Applicability of Loan Charge
A loan charge will apply under the following situations –
- If a person issued a loan or quasi loan to another person
- If a loan or quasi loan is issued on or after 6th April 1999.
- If amount of loan or quasi loan is still outstanding on or after 5th April 2019.
Circumstances Where Loan Charges Doesn’t Apply
The situations where loan charges doesn’t apply are as follows –
- If the outstanding amount is fully paid before 5th April 2019.
- Full income tax has already been paid to HMRC on the loan amount by way of settlement.
- If the full loan is already been taxed under disguised remuneration rules.
How Peoples Impacted by Loan Charge?
Many individuals and their families are impacted devastatingly by the introduction of loan charge. From last many years, HMRC failed to say a single word to thousands of individuals incurring high costs but in the current scenario, they want to take loan charges from all the individuals entered into this scheme since 1999.
The loan charges will affect around 60,000 individuals and their families in which some of the families are in immense pressure due to fear of insolvency, mental health & potential suicide.
Who Can Apply For Postponement?
You can only apply to postpone the loan charge payment date -
- If taxpayer will pay an amount to HMRC under accelerated payment notice that is equal to or more than outstanding loan balance.
- If If you get an approval from HMRC and your loan is classified as fixed term loan.
A person liable for loan charge can only apply for postponement. In case, if your employer is liable, you must provide them the relevant documents & ask them to apply for postponement of charges.
Proceedings In The Parliament
What Ipse (the Association Of Independent Professionals & The Self-employed) Said?
- IPSE criticized HMRC’s 2019 loan charge & agrees with House of Lords report.
- IPSE urged HMRC to refocus on their compliance efforts and focus on those individuals who are promoted as well as profited from the off-shore loan schemes.
- IPSE’s deputy director Andy Chamberlain said that due to the strict and aggressive approach of HMRC towards 2019 loan charges, thousands of tax payers & their families are in serious emotional distress. It is ruining the tax payers financially.
- IPSE recently wrote a letter to the chancellor to urge the government to take steps against strict & aggressive approach in relation to tax compliance.
- IPSE also said that HMRC’s IR35 reforms are already causing severe damages to the self-employed persons. Therefore, HMRC must finds better balance and treat the tax payers fairly.
- IPSE also commented that it is a right decision by HMRC to tackle tax evasion and tax avoidance but the steps they are taking for it will surely make some individuals insolvent.
- IPSE also said that it will cause a chilling effect on your flexible labor market too.
What HMRC Said?
What Economic Affairs Committee (EAC) Said?
- Economic affairs committee suggested that the government has added disproportionate powers to HMRC revenue raising toolbox due to reduced resources.
- The committee also suggested government to analyze & review the powers of HMRC and ensures greater accountability and increased scrutiny of the department’s activities in future.
- They also said that the behavior of HMRC towards the tax payers are shocking but backs HMRC campaign to grip those tax payers who escapes without paying their tax bill in full.
- EAC also suggested that HMRC has been prioritizing tax revenue over justice by getting aggressive on individuals rather than promoters.
- They also points out that the individuals who gave evidence to this enquiry are different from the individuals who identified to be involved in tax avoidance.
- They said that it is very disturbing to hear that individuals who are having no asset to settle their liabilities may result in bankruptcy.
- EAC said that this is annoying for the number of tax payers who would be required to retain records for long periods in comparison to current times.
- They also said that HMRC has a time period of 20 years to deal with fraud. We consider the extension of time period of 12 years for offshore matters which are annoying and have a large risk factor.
- They also suggested establishing a collaborative body involving civil servants, tax professionals & business organization for monitoring the relationship between HMRC & tax payer.
- They also said that new proposals for registration should be considered including taxpayer safeguard.
- They also said that HMRC should look after the issues around HMRC culture and deteriorating customer service.
- EAC concludes that HMRC lack of funding is the main reason that they are unable to perform its both roles of tax avoidance & tax evasion properly and ensuring that tax payers are treated fairly.
- Repay the loan to the trustees – Repayment of loan is one of the best options to consider. The last date for paying the outstanding loan is 5th April 2019. You don’t have to pay any loan charges, if you will pay the loan before the deadline i.e. 5th April 2019. The deadline for HMRC settlement i.e. 30th September 2018 has already been passed and it is already been discussed that instead of paying the money to HMRC on existing rates, it is better to pay the money back to the trust. They will invest this money and give taxable income in future.
- Pay 2019 Loan charge – If the payment of the outstanding amount is not done before 5th April 2019, the value of outstanding amount will be treated as earned income and loan charge will be applied on the same for 2018-19. This loan amount will be taxed for a single tax year and become very expensive to pay.
- Consider insolvency process – If you are unable to opt for the above two solutions. Then, the last solution which remains is that you have to pay the loan amount as well as the loan charge by selling your assets.
How DNS Help?
If you are a contractor and involved in schemes targeted by the loan charge and you are aware of the enquiry, it is essential that you take a professional advice as soon as possible. If you are facing an open enquiry, settlement before deadline may be the right and the cheapest option for that individual but not for another.
Finally, individual has to take its own decision as it is an important one as it causes a significant impact on their lives.
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