Loan Charge and Settlement - FAQs

1. What is Loan Charge?

Loan charge is a new tax charge introduced by the Finance (No.2) Act 2017. The legislation targets disguised remuneration (DR) schemes involving loans. In simple terms, the legislation will tax an amount of loan provided on or after 6 April 1999, that is still outstanding immediately on or after 5 April 2019.

For further details, please see this link - https://www.dnsassociates.co.uk/blog/loan-charge-a-guide-to-understanding-the-loan-charge

2. How is the tax under Loan Charge calculated?

Under the Loan Charge, all outstanding loans as on 05 April 2019 subjected to Loan Charge will be added together and taxed in one single tax year 2018-19. Depending on the nature of scheme, it could be employment, self-employment income or some other income. Your tax may be higher due to clubbing of all the loans and income in one tax year. It’s worth checking the comparison between Loan Charge and settlement if you were a basic rate tax payer in previous years.

3. What do you need to do under Loan Charge?

If your outstanding loans are exposed to Loan Charge, then you would need to:

• Include the outstanding disguised remuneration loans as income for each relevant employee, on Real Time Information (RTI) submission for April-19.
• The amount will be treated as income from employment as at 5th April 2019 and you will have PAYE and NIC due by 22 April 2019 (if paying electronically) or 19 April 2019 (if paying by post).
• If you have already paid Accelerated Payment Notice (APN), you can use credit against the Loan Charge.

If your employer has been dissolved or you do not have any employer, then you would still need to include the loan as income on your tax return and pay taxes and national insurance, where relevant.

4. What is settlement?

Settlement being referred here is a contractual agreement with HMRC on what is owed in relation to loan / other credits received under disguised remuneration schemes. Settling with HMRC will ensure loan charge does not apply and all relevant enquiries for the respective years are closed.

5. How is the tax liability calculated under settlement? How is it different to Loan Charge?

Under settlement the loans are allocated to respective years when received and taxed as income in the respective years.

Example:

If you have received a loan from DR scheme of £ 10,000 in 2012-13, £ 25,000 in 2013-14 and £ 100,000 in 2014-15.

Under Loan Charge, all loans will be added and taxed in single tax years of 2018-19. So, you will have extra earned income of £ 135,000.

But if you go for settlement, the loans will be allocated to respective tax years when received. So, £ 10,000 in 2012-13, £ 25,000 in 2013-14 and £ 100,000 in 2014-15. Along with other incomes, these loans amount will be considered and taxed accordingly.

6. Is there National Insurance (NIC) payable under settlement and loan charge?

It depends on the kind of scheme. If the scheme was employment based, HMRC will charge Employee and Employer NIC (this is mainly for directors) or there may be none. And if it was self-employment (or partnership) based schemes, there could be self-employment NICs payable (Class 4 NICs).

7. Why settle?

Settling now will give certainty about your disguised remuneration scheme and will mean you:

• do not have to pay the loan charge that comes into effect on 5 April 2019.
• pay a lower rate of tax on your disguised remuneration loans - the loan charge will add all your loans together and tax them in one year.
• settle on the terms provided by HMRC for settlement - if a scheme moves to litigation, these terms may no longer be available.
• do not face extra costs if the scheme moves to litigation.

8. Is Settlement always good?

It is based on individual circumstances. Various factors like: open enquiries, taxable incomes during the years where loan received, taxable income for 2018-19, the status of the party who was involved in loan schemes, risk appetite, scope of Accelerated Payment Notice, Follower Notice, and overall tax liability etc. can all decide which is better.

We would suggest you speak to us on individual basis, to decide the way forward.

9. I do not have money to pay under settlement, will HMRC offer Instalment plan?

HMRC have provided following information about the Instalment plan:

• Instalment offer of up to 7 years

  You can now spread your payments over a 7-year period without needing to provide detailed supporting information provided that:

  • You have an expected current year taxable income of less than £ 30k; and
  • You have now stopped using tax avoidance scheme.

• Instalment offer of up to 5 years

  You can now spread your payments over a 5-year period without needing to provide detailed supporting information provided that:

  • You have an expected current year taxable income of more than £ 30k, but less than £ 50k; and
  • You have now stopped using tax avoidance scheme.

• Instalment offer of more than 7 or 5 years or higher income level

  If your income for the current year is expected to be greater than £ 50k or you require longer period, then HMRC would still consider instalment offer. You will need to provide more information than above two situations.

10. Will HMRC charge Interest on instalment plan?

Yes, HMRC are charging interest under the instalment plan. In fact, under instalment plan, HMRC are charging 1% above the rate of late payment interest.

11. What happens to any overpayments / APN already made?

Both under Settlement or Loan Charge, you can use these funds to settle the tax bill. They will also affect the late payment interest.

12. Is there IHT due on settlement?

Yes, Inheritance tax could be due on settlement depending on the trust and what happens to the loan or time period since the first settlement.

Under settlement, it is important to clear the IHT position. Otherwise there could be IHT payable or compliance to complete later in future.

13. Is there IHT Due on Loan Charge and if not, can they come back in future for IHT tax?

The IHT implications around DR and loan are not very clear at the minute. There should be no IHT due on the loan charge immediately as the asset (cash which is loan) is not leaving the trust or is not affected in any way. In future, depending on what happens to the loans, there could be IHT implications.

14. What happens to loans under settlement?

The loan is an agreement between taxpayer and trust (in most cases), What happens to it, is down to agreement between these parties.

Under settlement, you can request HMRC to consider that that loan has been written off or will be written off in next 30 days. This will help finalise Inheritance tax position. You will need to get in touch with the Trust to write off the loan.

15. Can you drop out of settlement?

Until you sign off the Settlement Agreement with HMRC, you can leave the settlement at any point.

16. Can I claim expenses under settlement options?

Yes, you can claim expenses under settlement options. The rules or legislation applicable is based on the scheme structure, which could be normally, self-employment or employment.

In simple terms, for self-employed, the expenses need to satisfy wholly and exclusively principle. For employees, it would need to satisfy wholly, exclusively and necessarily principle.

Please discuss with us to see if you can claim any expenses.

17. What kind of expenses can be claimed?

The kind of expenses allowed are the same as normal employment and self-employment expenses. Some common expenses claimed are:

• Travel and Subsistence for business purpose or to a temporary workplace
• Training, CPDs and Subscriptions
• Use of Home/Rent
• Equipment’s bought
• Business Insurance
• Stationary and Telephone etc.

The expenses should not have been claimed previously when tax returns were completed.

18. How does expense claim help settlement?

Expenses reduces the income subjected to charge under settlement. So, any expenses claimed will save Income and NI, where relevant.

19. Do I need to provide evidence for expense claims?

Yes, HMRC can request for evidence or explanation to support the expense claim.

20. What are protected and unprotected years?

Protected years are the years for which HMRC have made an assessment or is still in time to make an assessment. Normally, these are last 4 tax years. Unprotected years are the years which are not protected years.

Under settlement, HMRC are not charging interest for unprotected years. So, if you are going for settlement for years with loan, where HMRC has not opened any enquiry or raised assessment, there will be no interest for late payment of tax.

21. What happens if legislation around Loan Charge is changed?

Supposedly if Loan Charge legislation is revoked, delayed or changed to affect in a different manner, the Loan Charge might not apply.

But this does not affect the enquiry / assessment already in place.

If you have already agreed a settlement, then there is a very high chance that you would not be able to go back to it. Settlement agreement is meant as an agreement from both parties to close the matter.

22. What happens to Loan Charge if the relevant company is dissolved?

If the company is dissolved, the Loan Charge still applies. The person who is affected by the Loan Charge will need to declare the loans under self-assessment and pay taxes.

23. Can I use limited company funds to make the payment for settlement?

There are schemes where limited companies were involved, e.g. where taxpayer was involved as an employee. Under such schemes, company also has a PAYE obligation. So, limited company can clear some settlement amounts directly.

There are other ways as well to make payment from limited company. Please get in touch with us to discuss further on this.

24. What are my other options except settlement or loan charge?

The other option to mitigate the Loan Charge is to pay the loan back to the trust. If there are no loans outstanding on 05/04/2019, then then would be no Loan Charge.

Please note you cannot receive this loan again at a later date. In that case, the previous loan would never be considered as paid.

25. What happens if I do not meet settlement payments?

HMRC will try to recover the outstanding balance together with interest. And they can also terminate the settlement agreement.

Termination of settlement agreement means Loan Charge applies.

26. Can HMRC bankrupt me if I cannot make all the payments?

Yes, HMRC can make someone bankrupt, but they have publicly mentioned that this will be the last resort, or where taxpayer is at risk of accruing further debt or where they are actively avoiding paying that.

As much as possible, they will agree on payments over a longer period, rather than take the bankruptcy route.

27. I have not received my settlement calculation yet, should I be worried?

According to HMRC, they have been flooded with requests for settlement. They have not been able to provide tax calculation for all as they had promised, where information is provided by 30/09/2018. So, you are not the only taxpayer who has not received the settlement calculation.

Loan Charge will not apply if you have provided all information relevant for settlement with HMRC by 05/04/2019.

If you do not settle with HMRC by 30 September 2019, then you will need to inform HMRC about the loans between 06 April 2019 and 30 September 2019.

28. Does Loan Charge apply if the loan is written off?

Yes, the Loan Charge still applies. It should be paid in monetary terms for Loan Charge not to apply.

29. Where will I find more information regarding Loan Charge, settlements, opposition on Loan Charge etc.

The best source to get information is HMRC’s website. Here are some important links which have more information:

Settlement – https://www.gov.uk/guidance/disguised-remuneration-settling-your-tax-affairs

https://www.gov.uk/government/publications/disguised-remuneration-detailed-settlement-terms/disguised-remuneration-detailed-settlement-terms

Loan Charge – https://www.gov.uk/government/publications/hmrc-issue-briefing-disguised-remuneration-charge-on-loans/hmrc-issue-briefing-disguised-remuneration-charge-on-loans

There are some action groups fighting against the Loan Charge. Here is one of them – Loan Charge Action Group (LCAG).

The FAQs are some of the questions that we frequently get asked around this topic. The questions and answers are not intended to be exhaustive and do not constitute professional and/or legal advice for your particular question, issue or concern, nor do the questions and answers create any duty on our part to assist you.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.