What the 2019 loan charge means for individuals now it’s in place
Announced in the 2016 Budget, the 2019 loan charge has been developed by HM Revenue and Customs (HMRC) to clamp down on the use of loan schemes in recent years and to nudge those who used those scheme to settle.
According to HMRC, an estimated 50,000 people are believed to have used loan schemes or ‘disguised remuneration schemes’ which will be affected by the loan charge.
Historically, some firms entered into arrangements which allowed a company to reward its employees via a loan made by a third party, often an employee benefit trust, with the company receiving a corporation tax deduction and the loan not being taxable in the hands of the recipient.
But in recent years, HMRC believe that scheme providers have exploited various parts of the existing legislation, which has enabled some individuals to avoid paying Income Tax and National Insurance at an estimated cost to HMRC of £3.2billion.
In HMRC’s words, it ‘has never approved these schemes and has always said they don’t work.’ And it has implemented the loan charge in an effort to put a stop to loan schemes.
Implemented on April 5 2019, the loan charge applies to anyone who has used a relevant loan scheme over the last 20 years.
The vast majority of those affected by the charge work within business services, which includes IT consultants and management consultants, and construction workers. This breakdown, taken from the HMRC website, illustrates where the impact of the charge will be felt:
Business services – 65%
Construction – 10%
Engineering – 4%
Medical and education services – 3%
Accountancy – 2%
Dentistry – 2%
Retail distribution – 2%
Other professional and technical services – 2%
Social and community services – <2%
Recreational services – <2%
Other financial activities – <2%
Other transport and storage – <2%
The options for anyone affected by the loan charge were to:
1. Repay the loan – before April 5, 2019.
2. Try to voluntarily agree to settle – any income tax and interest, before April 5, 2019.
3. Pay the loan charge – in many cases this option is likely to be more expensive than settling.
The charge is calculated by adding the amounts taken as tax-free loans over the relevant years together and taxing them as earned income in one year (2018–19) at the marginal rate of tax. The tax bills for people who have repeatedly used schemes will be higher than those who have used them once.
HMRC has stressed it wants to help people who have previously used loan schemes to get reach a settlement. It is offering flexible payment options for those who may find it difficult to pay the resulting tax liability.
For anyone who is currently in the settlement process, but has not finalised their Settlement with HMRC, as long as there are no delays caused by the taxpayer HMRC have confirmed that they will settle with the taxpayer despite the fact we have gone past the 5 April 2019, the date where the Loan Charge was triggered.
For everyone else details of relevant outstanding loans will need to be reported to HMRC and the Loan Charge paid.
There is still significant pressure for the Loan Charge legislation to be looked at again. It remains to be seen if there will be any changes implemented, or whether the change of Treasury Minister has any impact on the matter.