What accountants need to know about the Loan Charge in 2020

The loan charge rules were introduced by the government in April 2019 in an attempt to deal with disguised remuneration schemes. Many such schemes enabled individuals to earn a tax-free or low tax income, and so gain a tax advantage over others.

Disguised remuneration has been the focus of HMRC interest for some time, and the loan charge rules were designed to deal with this issue. So what changes are being made after such a short period of time since they were first introduced?

How are the loan charge rules changing?

One major criticism of the loan charge rules is the historical length of time HMRC can target taxpayers. HMRC could refer to loans as far back as 1999, so what is changing?

• From 2020 the timescale in which HMRC can look back at loans has considerably shortened - now only client loans from 9th December 2010 can be caught by the loan charge.
• If loans made after this date were disclosed on clients’ tax returns for the relevant periods, and an enquiry wasn’t opened by HMRC, they cannot now be caught by the loan charge. For any loans arranged after 5th April 2016, the loan charge will still apply.
• In some instances, taxpayers can spread their tax liability by reporting their income over a three year period. If any clients have loans that fall within the loan charge rules (up to the 2018/19 tax year), they can now report the associated additional income over tax years 2018-19, 2019-20, and 2020-21. This will have two positive effects on your clients’ situations:
  • It will spread the payment of tax over three years
  • It will lessen the likelihood of clients being pushed into a higher tax bracket, which could cause further financial hardship

• Any client reporting their liability for a loan charge has longer to submit their tax return to allow for the increased administration – the deadline is now 30 September 2020.

What if a loan charge has already been settled?

Some clients may have already settled their loan charge liability with HMRC, but would not have been liable for as much tax if the new rules were in place from the start. This is clearly not a fair situation, so HMRC have agreed to refund any extra tax payments that wouldn’t have occurred under the new rules.

It’s anticipated that Time to Pay arrangements (TTPs) will be available for eligible taxpayers to help with difficult financial situations created by the new loan charge rules. So how should you deal with these new rules within your own practice?

On a practical note, you need to categorise clients based on three factors:

• The date their loans were made
• Whether they’ve been fully disclosed to HMRC
• If any settlement with HMRC was agreed

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