The loan charge applies to individuals who received remuneration (disguised remuneration) in the form of loans that remained outstanding at 5 April 2019. The cumulative value of all outstanding loans received between 9 December 2010 and 5 April 2019 had to be reported in the individuals’ 2018/19 tax returns, subject to the reasonable disclosure point below, the normal submission date for which was 31 January 2020.
Those affected by the loan charge were given the opportunity to delay submission of their 2018/19 return to 30 September 2020, following an independent review led by Sir Amyas Morse. The deadline extension allowed time for taxpayers to consider HMRC's response to the review in a time of uncertainty, including a change meaning that the loan charge no longer applied to outstanding loans made in any tax years before 6 April 2016 where a reasonable disclosure of the use of the tax avoidance scheme was made to HMRC and HMRC did not take action.
In addition, an election could be made by 30 September 2020 to spread the loan charge across three tax years: 2018/19, 2019/20 and 2020/21. This deadline was extended to 31 December 2020 and late elections may still be considered by HMRC in extenuating circumstances. HMRC recently stated that 21,000 individuals could have benefitted from the loan charge spreading election; however, only 2,000 taxpayers took this up.
Following the Morse review, HMRC updated its loan charge guidance in January 2020 but this did not include reference to the spreading election. This means that individuals subject to the loan charge who submitted their 2018/19 self-assessment tax return before the normal filing deadline of 31 January 2020 may have missed out on the benefits provided by the review.
Affected individuals who have received an HMRC enquiry notice will likely be unrepresented or unaware that the loan charge even applies to them and this group is likely to include vulnerable and less wealthy taxpayers. Many will have been given no option not to use the scheme in the first place and now, many years later, may struggle with the difficult task of finding scheme promoters (who may no longer exist) and have no way to quantify and report loan figures with little or no information available to them. This category of individuals is one of the groups that the loan charge review was looking to address, but in not being able to benefit from the recommendations of the review arguably could end up being hardest hit.
Taxpayers who received enquiry letters in January 2021 referencing the loan charge may suffer a triple whammy if HMRC concludes their 2018/19 tax return should have included a loan charge liability. In short, subject to HMRC discretion:
- they will have missed the benefit of the spreading election;
- the cumulative value of omitted loans will be chargeable at their highest marginal tax rate, pushing many into the 40 per cent and 45 per cent tax brackets, with the potential loss of personal allowances too - the final tax liability will also be subject to interest and potentially penalties; and
- they will still need to engage with HMRC to resolve the enquiry into the historic tax scheme (a point that may be overlooked).
Those impacted by this issue can speak to an RSM tax dispute specialist on +44 (0)800 032 8374.