Self’s assessment: the loan charge

In 2012, I was interviewed on BBC Breakfast about Jimmy Carr’s tax planning: he had participated in a scheme (the Jersey-based K2 scheme) under which he had resigned from his company with any salary subsequently being paid to an offshore trust, combined with a loan back to the individual. I was asked whether the scheme was illegal. No, I said, but it was probably ineffective. Applying the duck test (if it looks like a duck, walks like a duck and quacks like a duck, it is probably a duck), I thought the amounts received as ‘loans’ were highly likely to be regarded as earnings.

 

Jimmy Carr withdrew from the scheme and issued an apology later the same day, which was ‘welcomed’ by Downing Street (bbc.in/2TPEjUw). Many others who participated in similar schemes may now wish they had done the same.

 

The 2019 loan charge was introduced by Budget 2016 and enacted in F(No. 2)A 2017. Any ‘disguised remuneration loans’ which are still outstanding on 5 April 2019 will be charged to tax, in full, as income for 2018/19. As that date gets closer, those affected are becoming increasingly vociferous about the consequences, and perceived unfairness, of the charge. There was even a Westminster Hall debate on 20 November (bit.ly/2ApsGux), at which many MPs expressed concern about the impact on their constituents, and urged Parliament to amend the law. It was good to see such a large number of MPs passionately debating a tax issue, although many of them failed to take the opportunity to do so when the legislation was originally before Parliament, despite detailed briefings from professional bodies at the time (see, for example, bit.ly/2gYZWCo).

 

Disguised remuneration loan schemes involved an employee receiving part of their former salary as a loan, typically either from an employee benefit trust (EBT) or an offshore umbrella company. It was tacitly understood that the loan was not intended to be repaid. HMRC has never accepted that the schemes worked, although it was undeniably slow to investigate some of those that were fully disclosed on tax returns.

 

The 2019 loan charge is not primarily about IR35, although there is some overlap. (The disguised remuneration loans were made to employees, but in some cases a contractor may have provided their services as an employee of an umbrella company or their own personal service company.) Nor is it about simple loans from employers for items such as season tickets, where the terms of the loan clearly require repayment. Bluntly, disguised remuneration loans were about dressing up part of an individual’s remuneration as a free gift on which tax would never be paid; in my view, this was aggressive avoidance. A large part of any blame should lie with those who devised and promoted the schemes, although those who entered into them were, at best, naïve or optimistic in thinking that they would not have to pay tax in the end. For lower paid agency workers in particular, it may have been hard to resist the pressure to use an umbrella company (some have said that assignments were only offered on these terms) and to recognise that tax was being avoided. Umbrella companies are a convenient way for multiple agency workers to be engaged, and the majority would not have operated loan schemes – many simply, and correctly, applied PAYE and NICs to the full amount of pay. EBT schemes, on the other hand, are much more likely to fall within the scope of the loan charge.

 

HMRC says that its view ‘has consistently been that these schemes are ineffective, challenging their use and publicising their risks’ (bit.ly/2L6K4wq). However, many taxpayers feel aggrieved that their schemes were fully disclosed to HMRC, which then failed to investigate for a number of years.  

 

Following the case of RFC 2012 [2017] UKSC 45, in November 2017 HMRC offered settlement terms to those affected (bit.ly/2yi9dtG). As is usual in such cases, the settlement terms require payment of the full amount of tax and interest. Unusually, however, taxpayers are also required in this case to ‘voluntarily’ agree to settle years outside the normal enquiry time limits. This is particularly harsh, but those affected are faced with a stark choice: agree to the ‘voluntary’ terms or face the full impact of the loan charge. Of course, there will be no loan charge if the loan is repaid in full, but many participants do not now have the funds available to do this, and face financial hardship.

 

The 2019 loan charge can legitimately be criticised for its retrospective nature. It will apply to loans made after 5 April 1999 which are still outstanding on 5 April 2019. HMRC says that the majority of loans have been outstanding for a much shorter period, which would seem to be a reason to restrict the charge to a shorter period, perhaps of six years. But the legislation has been passed in its current form and there is, in my view, little chance of it being amended at this late stage. 

 

Those affected say that HMRC should pursue the promoters or employers. HMRC says that it does, but if the promoter or employer is offshore or no longer in existence, then it will pursue the individual for the tax which should have been paid.

 

In summary, the legislation has a retrospective element, and HMRC’s settlement terms are harsh. Those who are affected need to take a realistic look at the options available to them. The guidance produced by the Low Incomes Tax Reform Group is unbiased and practical (bit.ly/2J07uyY), even if the consequences will still be difficult for many individuals. But above all, individuals should not be tempted by those who are still offering ways around the loan charge. Any apparently magic solution is, at this stage, unlikely to make the problem disappear in a puff of smoke.