Independent Loan Charge Review – where does this leave clients who have settled?
Charlotte Barbour and Susan Cattell discuss the position of the tax adviser and their clients, where clients have already settled with HMRC.
The Loan Charge, which was legislated for in 2016, arose from a desire to shut down the use of loan schemes. Such schemes had initially been used almost exclusively by large employers, but over time had become more of a mass market product. The loan charge was structured so that taxpayers facing it essentially had a choice - to settle with HMRC, pay off the outstanding loan balance, or pay the loan charge. It was intended to encourage settlements, and many tax agents advised their clients to settle. Due to the approach to calculating settlements many clients would have been better off settling, rather than waiting and paying the loan charge.
Key recommendations regarding the loan charge
The Review has made a number of recommendations that deal specifically with the loan charge and how to mitigate some of the most controversial aspects of the policy and its implementation. In summary, the two main recommendations (which the government has accepted) are:
- the loan charge will apply only to outstanding loans made on, or after, 9 December 2010
- the loan charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, opening an enquiry)
HMRC’s guidance sets out its view of the position for taxpayers in various different circumstances; this article considers some points which are relevant to those who have reached a settlement agreement with HMRC since March 2016 (when the loan charge was announced). Note too that the Review has said that no part of its report should be taken as support for reopening cases settled prior to March 2016.
Key recommendations for those who have reached a settlement
Those who have already settled with HMRC may now be asking their agents what they should do – will they receive a repayment and, if so, when? HMRC has said in its recently issued guidance:
‘HMRC will refund voluntary payments (known as ‘voluntary restitution’) already made in order to prevent the loan charge from arising and included in a settlement agreement reached since March 2016 (when the loan charge was announced) for any tax years where:
- the loan charge no longer applies (loans made before 9 December 2010)
- loans were made before 6 April 2016, the avoidance scheme use was fully disclosed to HMRC and the department did not take action (for example, opening an enquiry)’
However, for clients who are hoping to receive repayments, it should be noted that HMRC has also said that it will not be able to process any refunds until changes to the loan charge legislation have been enacted by Parliament.
HMRC’s guidance states that draft legislation and more detailed guidance (including guidance on interaction with any other taxes which may have been included in settlements) will be published in early 2020, alongside a timetable for implementing the changes. It adds that the changes are expected to become law in summer 2020, so refunds are unlikely to be available until later in the year.
The guidance sets out what clients should do now:
‘Check your settlement paperwork. If you have made voluntary restitution payments, these will usually be identified on the settlement agreement as amounts where no interest has been charged.’
And, where clients are paying their settlements by instalments (and have not yet paid the total amount agreed with HMRC), ‘If you are paying by instalments you should continue to make those payments. If you believe that you will have paid all you owe under the new loan charge rules before your instalment plan finishes, please contact us before stopping any payments.
HMRC won’t be able to process any refunds until the changes to the loan charge legislation have been enacted by Parliament. We expect this to be in summer 2020 and we will contact you after that date.’
What should the agent be doing? Due to the need to await the necessary legislation and additional guidance, it appears that there is very little that the agent can do at present.
However, the agent may well need to manage client expectations about when any repayments may be expected. The agent may also be concerned about their client relationships, where they advised the client to settle – but the client now has to wait for any repayment which may be due, or is expected to continue paying instalments.
There may also be room for disputes with HMRC about whether outstanding loans made from 9 December 2010, but before 6 April 2016, were fully disclosed to HMRC. In some cases, this will affect whether a repayment is due, or the amount of any repayment. HMRC’s December guidance states that broadly speaking, for the purpose of determining the scope of the loan charge, a scheme is to be treated as fully disclosed where an individual taxpayer provided “all the necessary information on their relevant tax return or, where appropriate, in associated documents. The information provided must have been sufficient that HMRC were able to identify the nature of the arrangement(s) and to conclude that an Income Tax liability arose in relation to the loan.”
HMRC notes that further guidance on the definition of full disclosure will be published alongside the draft legislation in early 2020. In due course when the legislation and additional guidance are available, the agent may want to consider what the correct amount of any repayment might be, although of course it may well be questionable whether any client will want to pay for this work.
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