In April 2019, HMRC's Loan Charge will crystallise against anyone who has taken part in a trust based disguised remuneration scheme in the last 20 years that has not been resolved. Most of the tax mitigation strategies that are going to be impacted by this are Employee Benefit Trusts (EBTs) and Employee Funded Retirement Benefit Schemes (EFRBS) – essentially any scheme that involved a loan being made to an employee; in most instances to mitigate income tax. For a more detailed explanation, see Nathan Talbott's article here.
Despite thousands continuing to challenge the legislation – the latest challenge being a human rights challenge and the House of Lords berating HMRC in December 2018 – the reality is that unless there is a complete volte face, the Loan Charge will be implemented on the April deadline. The impact of the Loan Charge is that any loans outstanding to such trusts will be treated as income received by the recipient of the loan in April 2019, with employers and employees liable to pay the respective levels of PAYE and National Insurance Contributions.
Whilst some owner managed businesses have sought to utilise new schemes and insolvency strategies to avoid the liability, HMRC are clear that such schemes do not work, and are quick to issue the necessary determinations if necessary.
Over the last 18 months or so, a significant proportion of our clients have taken the opportunity to settle with HMRC. This has the ancillary benefit of assisting our clients in establishing the loss they can seek to recover from negligent professional advisors recommending the tax mitigation strategy.
Some clients are sitting tight – in the knowledge that the Loan Charge is more advantageous for them than the current Settlement Opportunity given, for example, because of their historic income levels or cash flow requirements. Others are still hoping for a change of position from HMRC before April 2019.
We are currently dealing with a number of queries as to how the Loan Charge is actually going to "work". The onus is on the employee/borrower (who can be a director or shareholder), to disclose the loans to HMRC. Once disclosed HMRC will charge PAYE and NIC on those loans as if they had been received as income on 5 April 2019. The usual time periods apply to pay those sums (different for the employee and employer), failing which HMRC are likely to seek recovery in the usual way.
Don't disclose it, and fines and penalties will be imposed.
Can't pay it? Time to pay arrangements can be made with HMRC, but we suggest you get professional help in trying to go about these.
For a more detailed run down of how the process is actually going to apply, see Matthew Goodwin's article here.
Most importantly – check the calculations. HMRC is not perfect and there are a number of occasions where the figures we have been provided are incorrect. Make sure you check any calculations you receive.
Finally, if you, as an employer or employee, are in a difficult financial posision as a consequence of the Loan Charge, having received professional advice about its suitability for your specific circumstances, there is a possibility for a professional negligence claim against that adviser. There are strict deadlines for pursuing a claim against a negligent professional adviser therefore we recommend you take advice as soon as possible. Once the deadline to bring a claim has passed, you will not be able to pursue it.
Whatever your position, the Loan Charge does not appear to be going away. Therefore, if this issue does or may apply to you, then you should take advice as soon as possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.