The loan charge rules are complex and, as we explored in our article in August 2020, there are various points at which a tax charge could arise. This makes it difficult to structure an effective refund policy. For example, it was unclear whether claiming the loan charge refund could in fact mean that taxpayers lost the relief available to be offset against a future tax charge.
In its latest guidance, HMRC has outlined how the loan charge refund will operate and provides clarification on this issue. HMRC has specifically confirmed that the payment of a loan charge refund would not prejudice the person’s entitlement to relief on a further income tax charge upon a subsequent taxable step (such as on a loan write-off).
HMRC has been writing to taxpayers it understands to be eligible for the loan charge refund. These letters should have been sent by 1 October and set out the conditions to be met before a refund is due. Some of the conditions are surprising. Broadly the conditions are that the taxpayer:
- used disguised remuneration avoidance schemes from which loans were made between 6 April 1999 and 5 April 2016; and
- settled the tax due with HMRC on or after 16 March 2016 and before 11 March 2020; and
- paid some or all the tax or National Insurance Contributions (NIC) voluntarily to avoid the loan charge.
The guidance confirms that, so long as the taxpayer meets the three conditions above, they are eligible for a refund from HMRC. They are also eligible for relief on future income tax charges if a later step is taken which would otherwise be taxable. Applications for refunds must be made by 30 September 2021.
This is good news for those taxpayers who settled before 11 March 2020, and it is clearly worth these taxpayers seeking advice in relation to a refund. A question arises however for those taxpayers who reached settlement with HMRC on or after 11 March 2020.
We understand that those taxpayers who settled on or after 11 March 2020 will be eligible for relief on future income tax charges if there is a later step that might otherwise be taxable. However, the guidance indicates these taxpayers will not be eligible for loan charge refunds, even if the income tax and NIC were settled voluntarily by the taxpayer.
It is not clear why the Disguised Remuneration Repayment Scheme is limited to those who have settled by 11 March 2020. The relevance of the 11 March date is also uncertain, other than it being 2020 Budget day, as HMRC had made no reference to this date in earlier announcements of the repayment scheme. Instead HMRC directed individuals and advisers towards guidance to be published later in the year.
We urge HMRC to provide further clarity on why the rules appear to be drafted in this way, and why the date of the last Budget was set as the deadline, rather than 30 September 2020 (the deadline for reaching settlement with HMRC).