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Loan charge (Disguised remuneration charge) introduced by Finance Act (No.2) 2017 is a legislation brought by the government to charge tax on disguised remunerations provided by third parties in the form of loans made on or after 06th April 1999.

Loan Charge: A Guide to Understanding the Loan Charge

Disguised remuneration involving Loans from Contractor Loan Schemes, Employee Benefits Trusts (EBTs), Employer Financed Retirement Benefit Scheme (EFRBS) and various other schemes will be subjected to Loan Charge.

Conditions for Loan charge to apply

The Loan charge will apply where:

  • A person (“P”) will have made a loan or quasi-loan to a relevant person.
  • That loan or quasi-loan will have been made at some point on or after 6 April 1999.
  • An amount of the loan or quasi-loan is outstanding immediately before the end of 5 April 2019.

Amount falling under loan charge

Where an amount of a loan or quasi-loan is outstanding, the person (“P”) who made the loan or quasi-loan is treated as taking a relevant step immediately before the end of 5 April 2019 except for

  • where an approved fixed term loan has been made
  • where an application to be treated as taking the relevant step at a later date has been made by the relevant person following the payment of an accelerated payment notice

For the purposes of the loan charge, a loan includes any form of credit and a payment that is purported to be made by way of a loan.

The amount of the relevant step (outstanding loan balance) on that date becomes an amount which counts as employment income of the employee.

The individual’s employer in relation to the original loan will be liable to operate PAYE on the value of the relevant step. If the employer no longer exists on 5 April 2019, the employee will need to include the value of the relevant step in his or her Self-Assessment.

Circumstances where Loan charge doesn’t apply

There are some situations where loan charge will not apply, which are as follows:

  • Any outstanding loan is repaid in full before 5 April 2019
  • The loan is from an amount on which income tax has been accounted for in full (including under settlement with HMRC)
  • The loan has been taxed in full under the disguised remuneration rules
  • If loan falls under any exclusions

Where the taxpayer has paid an amount to HMRC under Accelerated Payment Notice (APN) notice, it is possible to postpone loan charge. To qualify, the amount of the loan outstanding at 5 April 2019 must be equal to or less than the value of the accelerated payments made.

Information providing requirement

The individual has a duty to provide details of loan amount to the employer if loan charge applies; so that employer can operate PAYE on the outstanding loan amount under the provisions of 2019 Loan Charge.

The 2019 loan charge provisions include a requirement that both the person who made the loan or quasi-loan and the employee who received it must provide information about the loan balance to the employer who is to operate PAYE.

The information must be sufficient for the employer to ascertain the amount of the loan which is outstanding immediately before the end of the loan charge date. It must include any other information that the employer may reasonably require in order that they can comply with the PAYE regulations.

The information needs to be communicated to employer within 10 days of the loan charge coming into effect. The individual and loan provider must take reasonable steps to contact the employer to provide loan balance information. If they have failed to make contact, each must notify HMRC that this is the case.

The loan charge information must also be provided to HMRC in a format specified by them between 5 April 2019 and 1 October 2019.

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