In December 2019, Sir Amyas Morse published a report setting out his recommendations on the loan charge policy and its implementation. One recommendation was to exclude from charge any loans made before 9 December 2010, and also loans made between 9 December 2010 and 5 April 2016 where “reasonable disclosure” of the loans was made.
By the time this recommendation was made many people had already reached a settlement with HMRC which included these years, based on the legislation and published guidance as it stood at the time. In some circumstances, a refund may be due, but is there a downside to claiming that refund?
When looking to tax ‘disguised remuneration’ paid by way of a loan HMRC potentially has three separate bites at the cherry.
First, when the payments were allocated (or loans received). Under the current settlement terms, HMRC looks to settle the income tax/NIC at this historic date, which might be at a lower tax rate than today.
Second, a charge arises when the loans are written off or distributed by the trustees. This is normally several years later and potentially at higher rates of tax. However, if tax is paid via a settlement at step 1 no further tax will be due.
The opportunity for the third bite was created when the loan charge was introduced. If settlement, or the intention to settle, had not been reached with HMRC, or if the loans had not been repaid on or before 5 April 2019, then loans outstanding at that date were to be treated as income and a charge would arise. If the loans were subsequently written off, or distributed, any tax already paid to HMRC would be offset against the loan charge.
Sir Amyas Morse’s recommendation meant that for some, the third bite no longer applied. However, if the taxpayer had previously reached settlement with HMRC, it might have been agreed that the loans would be written off post-settlement triggering the second tax charge. If a refund is requested by the taxpayer, the tax paid via the settlement is no longer available as a set-off against this charge.
We approached HMRC for urgent clarification on these refunds but have been advised that further guidance may not be published for some weeks. HMRC estimates that around 1,000 individuals and 1,000 employers could be entitled to refunds. Before taxpayers rush to claim a refund or spend any amounts already received, they should consider whether this will result in HMRC gaining a larger bite of the tax cherry than under the settlement.