Prime Minister Boris Johnson has announced a review of the loan charge following pressure from campaign groups. The loan charge is estimated to affect around 50,000 people.
Those who felt HMRC has unfairly penalised thousands of people caught under the loan charge welcomed the review, although little detail has been revealed. Announced in the 2016 Budget, the loan charge was designed to claw back tax lost on so-called ‘disguised remuneration schemes’ set up in the 2000s. The charge has brought HMRC under criticism for landing some people with unreasonably high tax bills.
Disguised remuneration offered workers loans instead of salary, designed to avoid both tax and national insurance payments. Contractors, employers and, in some cases employees, have been affected. Tax was paid on the benefit of having the interest-free loan, but many never expected to repay the loans. Rules against the schemes did not come into effect until 2010.
HMRC has used the loan tax charge to collect payment from individuals using these schemes by totaling all outstanding loans, in some cases going back twenty years, and taxing a lump sum of income in one year. A deadline for payment was set for the end of January 2020, although HMRC has said there are payment plans available to spread the cost.
Of the estimated 50,000 people affected, some were not even aware that they were involved in a disguised remuneration scheme. An inquiry by the House of Lords found that some workers employed through agencies in, for example, NHS roles, were working through umbrella companies using disguised remuneration.
The possibility of mass bankruptcies, and news of two suicides allegedly due to receiving high tax bills, has put the loan charge on the front page. While some have little sympathy for the thousands caught in the trap, blaming blatant tax avoidance employed in the schemes, others have highlighted HMRC’s slow response to the problem and its unrealistic expectations placed on individuals.
A deadline for finalising voluntary settlements passed on 31 August, but there are two more milestones to come – loans affected by the loan charge must be disclosed to HMRC through its online portal by 30 September and must be included as part of the tax return by 31 January 2020.
Whatever the outcome of the review, the loan charge is a salutary lesson in the dangers of attempting tax avoidance in general and around employment tax specifically. If in any doubt about terms of employment or any scheme which sounds too good to be true, erring on the side of caution, and taking professional advice, is the best first defence.