The loan charge is an attempt to tax certain so-called ‘disguised remuneration’ schemes under which employees, workers or contractors are paid not through wages or salary subject to payroll taxes, but by means of a loan, usually routed through a third party such as an employee benefit trust or kindred vehicle. In practice, such loans are cheap or interest-free and are generally non-repayable. HMRC’s view is that these loans are essentially employment income, and tax and NIC should have been accounted for on that basis.
Essentially, the charge will operate where a loan made to an employee, contractor or similar individual on or after 6 April 1999 has not been repaid by 5 April 2019, or where terms have not been agreed with HMRC by that date for making good any underpayment of tax arising.
Legislation to counter ‘disguised remuneration’ schemes was first introduced in 2011 and has been developed since then to take account of the variety and sophistication of such schemes on the market. Most schemes involve the payment of individuals via loans or asset transfers routed through a third party. The loan charge, introduced by F(No 2)A 2017, Sch 11 and modified by FA 2018, Sch 1, is the latest in this sequence of anti-avoidance legislation.
The charge is arguably retrospective, in that past arrangements are now subjected to a tax charge that did not apply when they were entered into. It could be seen as punitive in that all loans made within the last 20 years that are outstanding on 5 April 2019 are treated as taxable income in that one tax year, 2018/19, rather than spread out over the several years in which they accrued. Any tax already paid under the benefit-in-kind charge on cheap or interest-free loans is deductible in working out the charge, and if terms for settlement have been agreed with HMRC by 5 April 2019, the charge will not apply.
While some individuals may have accepted payment on such terms knowing or suspecting that they were in reality receiving employment income on which tax and NICs should be paid, others will have had little choice in the matter – except to work on the terms offered, or to work elsewhere, or not at all. This latter category of workers – typically agency workers who work through umbrella companies – would have generally relied on what they were told by those engaging their labour and it may not have occurred to them to question the detailed tax implications of the method by which they were paid. Most were not high earners; the amounts of the untaxed element of their pay were not significant; payslips may only have been available online or via portals which few were likely to check; and in any case, temporary worker payslips are notoriously difficult to interpret. Besides, few of the umbrella companies or scheme promoters will have registered under DOTAS, so the workers would have been unaware that anything was amiss.
From their perspective, the loan charge seems grossly unfair, particularly as it is considered as employment income and, under general principles, any PAYE liability should be accounted for by their employer under the PAYE Regulations. While liability to make good any PAYE under-deduction rests on the employer in the first instance, in many cases the employer may be offshore, or no longer in existence. On the one hand, the loan charge legislation applies irrespective of correct PAYE procedure, making the individual liable from the outset; on the other hand, HMRC say that it is the employee’s responsibility to report the employment income to HMRC by making a self-assessment return.
Nevertheless, the Loan Charge Action Group is proposing to apply to the High Court for a declaration that the loan charge, and any attempt to enforce it, would be incompatible with the European Convention on Human Rights. It is their belief that ‘the government and HMRC have no legal or moral basis’ to apply it. If the judicial review action is ultimately successful, it would then be up to the government to decide whether to proceed despite the Court declaration, or to change the law – or simply not to enforce collection of the tax due.
Meanwhile, some may be unwilling to trust to the vagaries of litigation, wishing instead to settle their affairs with HMRC and so escape the loan charge. Although the 30 September 2018 deadline for approaching HMRC has passed, it may still be worth doing so, although HMRC can’t guarantee to reach a settlement before 5 April 2019. HMRC are inviting those who may be affected to attend a webinar on 21 November at 12pm. For an independent commentary, an excellent article on the website of the Low Incomes Tax Reform Group explains the background in much more detail, including how to go about approaching HMRC and what to expect by way of an agreed settlement.
Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy, and a part-time senior policy adviser at the Office of Tax Simplification. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018.
The author is very grateful to Meredith McCammond of the Low Incomes Tax Reform Group for her review of this article.
See also: Taxation of Employments (18th edition) by Robert Maas.