Loan Charge under Review: but is it enough?

The controversial loan charge is to be reviewed to see if it is the most appropriate way of dealing with disguised remuneration schemes.

The review follows criticism of the loan charge policy by business groups, MPs and the House of Lords.

HM Revenue & Customs (HMRC) has been accused of being too "aggressive" into its handling of the policy.

The review has already come under attack for not being independent enough and for not going far enough in seeking external evidence.

Sir Amyas Morse will head the review. He is a chartered accountant and former head of the National Audit Office, but he has previously called for a crackdown on marketed tax avoidance schemes. In addition, his team will consist of staff from HMRC and HM Treasury, leading to the impression that there will be little independence in the review.

There is no suspension in the loan charge policy whilst the review is being undertaken, although it is understood that HMRC has already put a number of settlements on hold pending the review.

Disguised remuneration (“DR”) schemes (typically involving Employee Benefit Trusts (EBTs), Employer-Financed Unapproved Retirement Benefit Schemes (EFURBS) and other third party structures such as umbrella companies) have historically been structured based on tax-free loans being made to an employee or a contractor in lieu of remuneration, with such loans remaining outstanding over the longer-term, or indefinitely.

However, thousands of workers on low pay were also entered into schemes by their employers.

Legislation was announced in 2016 that any outstanding loans as at 5 April 2019 would be ‘deemed’ earnings, with potential tax and National Insurance charges of over 60%.

A House of Lords inquiry into the legislation found it to be "unfair".

The loan charge is retrospective in nature in that it effectively adds together all outstanding loans over a period of up to 20 years, then taxes them as income in one tax year.

There are a number of payment schemes on offer by HMRC to settle outstanding tax, but many affected face financial hardship and have already had to sell their homes to pay the tax.

More information about the loan charge can be found in our previous article.

The outcome of the review should be known towards the end of November 2019. It should become clear after that whether there will be a change in the legislation or at least a change in the way it is administered.