The 2019 loan charge is a retrospective ruling which takes action against those who were paid through loan schemes such as EBT and PBT. These schemes were utilised mainly by contractors, often under the advice of trusted financial professionals.
HMRC have recently declared these schemes to be a form of disguised remuneration and are now demanding that money obtained in this way be reclassified as income with appropriate levels of tax charged accordingly.
How did these loan schemes work?
The mechanics behind these schemes are complex; however, put simply the contractor would have taken a small salary, with the rest of their income being paid out in the form of a loan. Although these were called ‘loans’, they were never intended to be paid back; it was instead an alternative way of receiving money from clients which wasn’t deemed to be a salary or dividend.
HMRC are now chasing those who have these loans which remain outstanding. Due to the way these schemes were designed, the vast majority of these loans were never paid back and therefore remain outstanding to this day.
Unfortunately many individuals were advised to take advantage of these schemes believing it was a legitimate way of receiving more of the money they earned as opposed to if this money was paid as a salary or taken as dividends. Many individuals used these schemes for a number of years, and with the ruling going as far back as 6 April 1999, many people could be faced with eye watering sums of money to repay. The exact number of people affected is unknown at this stage but estimates range from 40,000 through to in excess of 100,000 individuals.
What should I do if I think I may be affected?
Register your interest to settle
If you believe you have been involved in one of these schemes you will need to contact HMRC and make them aware. You will need to ask to register your interest to settle the tax you owe and provide the required information for your settlement figure to be calculated; the deadline for this was originally set for April 2018, but has been extended to 30 September 2018. If you take this option, the loans would be treated as income in the year in which they were taken, and appropriate levels of tax and national insurance would be levied on this. Interest will also be added.
If you follow this route, you will not have to pay the loan charge when it is introduced. It is your responsibility to contact HMRC if you are affected; they will not contact you unless you are already under investigation.
Wait for the 2019 loan charge
Alternatively, if you do nothing then you will have to take action when the ruling comes into force in April 2019. You will then be sent your loan charge bill from HMRC. This will group all your loans together and treat them as income for the current year. Income tax and national insurance would then be levied. Depending on the figures involved, it is highly likely that you will find yourself in the additional rate tax band which attracts tax at a rate of 45% and also removes your personal allowance for the year.
While each individual case will vary, it is likely that most individuals will face a lower bill by using the settlement option rather than waiting for the 2019 loan charge to be introduced.
What if I cannot pay the amount requested?
The settlement figure is non-negotiable and must be paid in full; however, HMRC has indicated that they are open to agreeing to payment plans to certain people should they not be able to offer immediate full settlement. You may qualify for a repayment plan if your current income is less than £50,000. Payment plans may be taken for a period of up to 5 years, however, interest will be charged during this time so the quicker you can settle the amount you owe the better.
What are my next steps?
If you think you are likely to be affected by this ruling, it is advisable to speak to HMRC in order to register your interest in settling. Alternatively, your accountant should also be able to help clarify your position and advise you on whether you are going to be impacted. You may need to speak to a specialist tax adviser; your accountant should be able to recommend someone.
If you need help finding an accountant, Handpicked Accountants can help. We can recommend a trusted accountant in your local area that can be relied upon to do a good job. Call our expert team today on 0800 063 9258 who will be happy to connect you with the perfect accountant based on your needs and requirements.