When does the loan charge apply?
For clarity, the loan charge does not apply to directors loan accounts which are drawn directly from the company. This will continue to attract S455 tax liability paid through the corporation tax scheme. The loan charge will apply when funds are loaned in lieu of remuneration through planned tax arrangements. We cover some of these schemes here.
Specifically, the loan charge will apply in the following circumstances:
- A loan is made to an employee through a third party intermediary.
- The loan was granted after 5 April 1999.
- The loan is outstanding in whole or in part before midnight on 5 April 2019.
In the first instance, HM Revenue & Customs will seek to pursue the employer for the loan charge. However, in the event the loan charge is deemed irrecoverable from the employer, ie they have gone into voluntary liquidation or another insolvency procedure, or they are now overseas, HM Revenue & Customs will pursue the beneficiary of the loan, being the employee. This is particularly unfortunate where the employer has not given the employee an alternative but to enter the scheme. We cover the ramifications of this below.
How much is the loan charge?
One of the most daunting issues with the loan charge is the rate at which it will be charged. The effect of the loan charge will be to reclassify any outstanding loan as income. All income will be combined into the 2018/19 tax year. The effect of this, if you have received remuneration as loans through a scheme for the past 20 years, is that you will likely be paying the majority of this tax at the additional rate of 45%. Below is an illustration, based on 2018/19 tax rates.
As can be seen from the illustration, under the loan charge the tax obligation on the employer can almost double. Rather than being spread over 7 years in manageable payments, the lump sum will fall due in one tax year, creating a massive tax burden to deal with.
How will HMRC enforce the loan charge?
The harsh reality is that over half of businesses to whom the loan charge applies are likely to be balance sheet insolvent. It is also likely that the majority of those receiving the notice will not have the liquid funds to settle the balance. As stated at the start of this article, where HM Revenue & Customs are unable to make a recovery from the employer, they will seek to pursue the employee through the transfer of liability mechanism.
HMRC have confirmed that if you seek to actively settle your liabilities under the new loan charge, but need time to pay, payments can be spread over 5 years in the following conditions:
- Your taxable income is less than £50,000 per annum.
- You have ceased engaging in tax avoidance activities.
HMRC have a wide range of enforcement powers available to them, but the main response they are looking for is for employers or employees to engage with them. If they are satisfied that the most tax possible is being recovered they may take a write off for the balance rather than instigating expensive proceedings. If you, however, do not engage with HM Revenue & Customs this may result in a winding up petition against employers and bankruptcy petitions against employees.
Can I appeal against the loan charge?
The loan charge is set in legislation so it is extremely difficult to lodge an appeal against this. However, there are two circumstances under which the loan charge may be postponed:
- There is a fixed repayment date for the loan.
- A follower notice and accelerated payment notices has already been issued against the loan.
Neither of these alternatives are particularly good being that either the outstanding loan has to be repaid or there is an even earlier date for the payment of the tax on the loan, being it has already been reclassified as remuneration.
If you are likely to be one of the many businesses or employees who will be unable to pay the loan charge on 5 April 2019, now is the time to start considering your next steps. You have until 30 September 2018 to submit your settlement proposals to HM Revenue & Customs. More information on doing this can be found here.
Alternatively, as with many others, you may need to consider formal insolvency if the tax burden is simply too much to bear. Through proper preparation, individuals may be able to propose an IVA, where limited companies may wish to propose a CVA, or act to enter voluntary liquidation before a winding up petition is presented. Our business rescue experts can take you through the option available from straightforward time to pay arrangements to formal insolvency options.