Loan Charge reforms backed by independent review and HMRC

The controversial Loan Charge has been the subject of an independent review by Sir Amyas Morse, which upholds the basis of the legislation while recommending several reforms. 

The Loan Charge originally came into effect in April 2019, targeting disguised remuneration schemes. These tax avoidance arrangements paid workers in loans rather than as traditional income, which allowed individuals to avoid paying their income tax and National Insurance contributions. 

However, since these types of loans were never intended to be repaid, they were still taxable, creating a backlog of unpaid taxes for many individuals paid in this manner. Since the Loan Charge is applicable on loans dating back to April 1999, some individuals face paying back extraordinary amounts of money. 

This has created confusion and fear for individuals who were paid with disguised remuneration loans, even going so far as to drive multiple people to death by suicide. Fuelled by these deaths and public uproar, Morse began looking into reforming the Charge with an independent review, published in late December 2019. 

The review was created with the feedback of over 700 individuals personally affected by the Loan Charge scheme, as well as input from MPs, experts, campaigners, and both tax and legal professionals.  

Explaining the review, Morse said: “The foundation of our tax system is fairness and where this is undermined through avoidance schemes it is right that these are tackled. However, in doing so, the government and HMRC must act proportionately and responsibly. 

“As my Review makes clear, the design and delivery of the Loan Charge didn’t get the balance right between tackling tax avoidance and protecting the rights of taxpayers and, in some cases, has caused serious distress to the individuals affected.” 

Recommended changes to the Loan Charge 

The biggest recommended change to the Loan Charge is that it should not apply to loans made before 9 December 2010, but that tax can be recouped from loans entered into after that date. 

Additionally, the review recommends a change in the way that tax is repaid, scrapping the idea that taxpayers should repay multiple years’ income as a lump sum. Instead, taxpayers should be offered the chance to split this cost over three tax years. 

Leading off that, Morse’s review says that HMRC should honour their original commitment when it comes to protecting vulnerable taxpayers. The tax authority should not force the sale of primary homes, push for bankruptcy, or ask a taxpayer to pay more than 50% of their disposable income. 

“Whilst it is definitely not a whitewash, the government has accepted some key recommendations, which will be a big boost to those affected,” said Jon Claypole, tax partner at BDO. 

HMRC ready to take partial action 

Many of these recommendations made by Morse have been taken on board by HMRC, although several points have been struck down. 

For instance, refunds will be made on voluntary payments for loans made before 9 December, 2010, and specific loans made before 6 April, 2016. Additionally, taxpayers will be able to spread their outstanding loan balance across multiple years, offering some flexibility to those who would otherwise struggle to repay their loans. 

However, HMRC rejected Morse’s recommendation to introduce a tax write-off on the Loan Charge after 10 years, citing that this would offer an unfair advantage to those who used DR avoidance schemes and would reduce any incentive to pay off the debt. 

New measures have also been announced by the government to tackle avoidance scheme promoters, encouraging HMRC to issue stop notices more effectively and prevent corporate entity structures to be abused by promoters. 

In line with the recommendations, HMRC will also fund an external body designed to offer advice to individuals who are struggling with or unable to pay their debts. 

To bolster this, HMRC’s Income and Expenditure form HAS also been published, allowing taxpayers to see how the tax authority uses information to create Time to Pay arrangements. 

However, refunds will not be processed by HMRC until summer 2020, when the legislation has officially become law. HMRC’s website has detailed guidance for individuals being affected by the Loan Charge, as well as dedicated email addresses and phone lines to assist taxpayers through these changes.