Independent Loan Charge Review – consequences for the insolvency profession
Steven Wood considers the recent independent Loan Charge review from an insolvency perspective.
The Review’s remit
Sir Amyas Morse was asked last September by the Chancellor of the Exchequer to conduct an independent review (‘the Review’) into the Government’s Loan Charge and whether it was an appropriate response to tax avoidance by individuals who had entered into loan schemes (that is loans constituting ‘disguised remuneration’ and intended to avoid tax and NIC). The Loan Charge, which was legislated for in 2016, was aimed at shutting down the use of loan schemes by levying a tax charge unless a settlement had been agreed.
The Loan Charge has proved to be controversial and is estimated by the Government to affect around 50,000 people.
The recommendations and consequences for the tax profession
There are 20 Recommendations in the Review (see pages 9-12) and more details surrounding these are covered in Charlotte Barbour’s previous article. That article looks at the Loan Charge from the perspective of the tax profession. A follow-up article looking at the position of the tax adviser and their clients, where clients have already settled with HMRC, has also been published.
Insolvency and HMRC repayment
There is a clear indication from the Review and the Government’s response that there is no intention to force people into bankruptcy or to sell their homes.
The Review states:
“The Government has been clear that it does not want to force people into bankruptcy or to sell their main home. I support this view. The mitigations already provided by HMRC, principally in payment terms, are significant, but need to go further, to help achieve those aims and to respond to taxpayer distress. No individual in the scope of the Loan Charge should have to pay more than half of their disposable income in a single year and a reasonable proportion of their liquid assets, and they should not be forced into losing their house or existing pension pot, or being made bankrupt”.
The Review goes on to recommend that those with an income of less than £30,000 in the 2017-18 tax year should not have to pay HMRC for longer than 10 years of paying an instalment arrangement. They should also pay no more than half of their disposable income in any given year. Any remaining sum at the end of the 10 years would then be written off.
However, the Government consider that allowing some Loan Charge liability to be written off would “treat tax avoiders more favourably than other individuals with HMRC debts (including tax credit claimants), would reduce taxpayers’ incentive to pay off the debt, and would have unwelcome wider impacts that change how HMRC and those in debt interact”. As a result, that recommendation is rejected.
The Government does, however, accept the recommendation that all individuals subject to the Loan Charge should only be asked to pay up to half their disposable income each year and a reasonable proportion of their liquid assets. It further accepts that no one should have to sell their primary residence or use their existing pension pot to pay the Loan Charge.
The Government also accepts the recommendation that where taxpayers earn less than £50,000, they should be automatically entitled to a minimum of a five-year payment plan, and where they earn less than £30,000, a minimum of seven years.
It was also recommended that HMRC should fund an external body to provide independent advice to lower-income taxpayers who are discussing payment arrangements and debt collection with HMRC, including on potential suitability of insolvency arrangements. The Government has agreed to fund such a body. No further details on this have been announced at the time of this article although the most obvious route would be for funding to be provided through the Single Financial Guidance Body or one of the tax charities such as TaxAid.
The Government has further confirmed that HMRC will, in line with current practice:
- Guarantee time to pay arrangements wherever an affordability assessment shows an individual cannot pay in full;
- Accept Single Financial Statements (we assume this is an error in the Government Response and it should refer to the Standard Financial Statement but are seeking clarification from HMRC) completed by the taxpayer with a debt advice charity as proof of affordability;
- Stop all recovery action where the taxpayer has no ability to pay until there is a significant change of circumstance; and
- Not seek bankruptcy proceedings for individuals who have engaged with HMRC, completed an affordability assessment, and are solely unable to pay the Loan Charge
When advising an individual whose debts include a liability by way of a Loan Charge, insolvency practitioners and their staff will need to factor in the stance being taken by the Government as it may materially impact the advice being given and the appropriate route for an individual, particularly if the Loan Charge forms a significant part of their liabilities.
While the Government Response only makes mention of accepting proof of affordability with a debt advice charity, we are seeking clarification from HMRC that the same approach will be taken where the Single Financial Statement is completed by through an insolvency practitioner or their firm.
Insolvency claims and assessment of Loan Charge liability
The Review recognises that there was a clear public interest in preventing the use of loan schemes to avoid tax and supports “the essential purpose of the Loan Charge”,
However, it forms the view that “elements of the Loan Charge go too far in undermining or overriding taxpayer protections”.
The Review concludes that the Loan Charge ‘look back’ period of 20 years goes ”too far and should be changed”, with a recommendation that it should not apply to loans entered into before 9 December 2010 “given the broad consensus that Finance Act 2011 both made the Government’s position clear and prevented future loan schemes from achieving their aim”, effectively removing any doubt that the tax was due. The Government accepts this recommendation.
The Government also accepts the recommendation that loans taken out between 9 December 2010 and 5 April 2016 inclusive, will be outwith the scope of the Loan Charge if the user of the scheme disclosed full details of their avoidance scheme on their tax return, and HMRC failed to take action to protect its position, for example, by opening an enquiry.
The Government have further agreed that HMRC should refund the Voluntary Restitution elements of settlements made since 2016 that were paid to settle unprotected years when the relevant loans were entered into:
a) prior to 9th December 2010; or
b) between 9th December 2010 and the start of the 2016-17 tax year, where the scheme user-made reasonable disclosure of their scheme usage in their tax return.
The Governments’ response states “those who have already settled their tax liability have complied with their tax obligations under settlement terms designed on the basis of the Loan Charge applying to all years. These taxpayers should benefit from the decision not to apply the Loan Charge to unprotected years.”
As a result, HMRC will repay Voluntary Restitution that has been paid by individuals and employers.
As with all these changes, HMRC are not able to implement any measures (or process any refunds) until changes to the Loan Charge legislation have been enacted by Parliament.
All of this means that whether advising prior to insolvency or adjudicating on claims, insolvency practitioners and their staff will need to take a significant amount of care in assessing HMRC’s liability under a Loan Charge and in considering whether any refund may be due to an individual or employer firm. The timing of the loans and level of disclosures made will have a significant bearing on the level of liability due.
Insolvency practitioners will also need to give careful consideration to situations where individuals have entered into an insolvency arrangement or debt payment plan under DAS based on a Loan Charge tax liability and, specifically, how the changes impact the debtor’s overall indebtedness. For sequestrations, there is clearly a possibility that some impacted individuals may be in a position to seek recall.
In all instances, there may be a direct bearing on case duration, which might require variations in the case of DAS. For insolvency solutions, case strategy in terms of asset realisations may need to be reviewed.