What is the 2019 Loan Charge?

7th March 2019

What is the 2019 Loan Charge and could you be affected?

The 2019 Loan Charge is a government measure aimed claiming back Income Tax and NIC payments that were avoided by employees and employers participating in “disguised remuneration” or loan schemes.  If you have been involved in a disguised remuneration loan scheme and have not arranged to settle any liabilities owed then you only have until 5th April 2019 to do so, otherwise you will run the risk of penalties and other charges, in addition to the total already owed.

loan charge 2019

What is Disguised Remuneration?

People using ‘loan schemes’, otherwise known as ‘disguised remuneration’, had their salary paid through loans, rather than being paid in the usual way.

With a loan you would usually expect to have to pay it back, often with interest.  Loans within loan schemes were set up and paid in such a way that it was unlikely that they would ever have to be repaid and no Income Tax or NICs would be due.

An example of how a loan scheme was used:

  • Money was paid by the employing company into an “umbrella company”
  • This umbrella company then “loaned” money to a self employed worker
  • Because the money did not class as salary, then no employer NICs were paid and no Income Tax or NICs were paid by the self-employed worker, providing that the worker paid some “interest” on the loan.

HMRC has stated that “It’s highly unusual to receive your salary in loans and is clearly a method used to avoid paying tax.” and the government has taken steps to reclaim back this lost tax.

An estimated 50,000 people have used a loan scheme that will be affected by the loan charge. Most of them work in the ‘business services’ industry – this includes jobs like IT consultants, financial advisers and management consultants.

What is the 2019 Loan Charge?

A new charge has been introduced on outstanding disguised remuneration loans, known as The 2019 Loan Charge. The charge applies to all loans of this nature that have been made since 6 April 1999 if they are still outstanding on 5 April 2019. However the charge will not arise on those who have either repaid their loan or agreed a settlement with HMRC by 5 April 2019.

HMRC is urging anyone who has not yet settled their use of disguised remuneration to do so before the deadline to avoid the charge.

disguised remuneration

How much will you have to pay?

The terms of what and how you have to pay back will differ depending on how you are categorised by HMRC:

  • A Contractor – You are categorised as a contractor if your services are provided to clients that do not directly employ you.  You could provide your services through an umbrella company, an agency, a partnership or your own company.  You can check if you have used a contractor loan scheme here.
  • An Employer – You are classed as an employer if you entered into a scheme to reward your employees.
  • An Employee – You are categorised as an employee if you’re not a contractor and were paid through a disguised remuneration scheme used by your employer.

 

As a Contractor you will need to pay:

  • Income Tax on the net amount of all disguised remuneration loans made – the totals will be calculated using the relevant rates and bands in the years that the loans were made.
  • Any late payment interest for any years where there is an open enquiry, is time to open one or an assessment is in place
  • NI contributions, in the instance where you are a self-employed contractor
  • Any incurred penalties and/or IHT

 

As an employer, you will need to pay:

  • Income Tax and NICs on the total within the loan scheme.  The total amount due will be calculated using the relevant bands and rates for the years in which the loans were made.
  • Any late payment interest for any years where there is an open enquiry, is time to open one or an assessment is in place
  • Any incurred penalties and/or IHT

There is scope to reduce the total by any NICs paid by you or Income Tax paid by an employee due to declaring Benefits in Kind, but this is only possible if the relevant tax year is in time to be adjusted or an overpayment relief claim is being made.  You will not be required to pay any Corporation Tax on any fee paid to the scheme promoter when entering the scheme.

As an employee you will need to pay:

In the instance where your employer has not settled, you will need to pay:

  • Any Income Tax or NICs that your employer would have paid if they were settling your tax affairs
  • Any late payment interest for any years where there is an open enquiry, is time to open one or an assessment is in place
  • Any incurred penalties and/or IHT depending on the loan scheme in which you were in.

There is scope to reduce the total by any Income Tax that you paid due to declaring Benefits in Kind, but this is only possible if the relevant tax year is in time to be adjusted or an overpayment relief claim is being made.

How to settle with HMRC

If you missed last year’s deadlines you should contact the HMRC as soon as possible to declare your interest in settling your use of a loan scheme.  All of the information must be there by 5th April 2019 at the latest.  If not you will have missed the final deadline and the loan charge will apply.

Which information do you need to send?

As a contractor or employee, you will need to send the following information to HMRC:

  • Your National Insurance number
  • Your unique taxpayer reference (UTR)
  • The total amount of contractor loans or contributions made in each tax year
  • Whether any Benefits in Kind are being claimed to offset the total
  • The name of your employer

Plus, if you know the following information you should also send:

  • The date any trust, sub-trust or other entity was created
  • The amount of the contribution paid into it
  • Any assets held in that trust, other than cash or the loan agreements

As an employer, you will need to send the following information to HMRC:

  • Your company name and company reference number
  • Your PAYE reference number
  • The amounts and dates of funds paid into the loan scheme
  • Details of any Corporation Tax relief you claimed on the contributions to the scheme
  • Whether any Benefits in Kind are being claimed to offset the total

 

Beware of scheme promoters offering ways to avoid the loan charges

Some loan scheme promoters have been advertising additional schemes that they claim will avoid the loan charge.  HMRC has issued a warning about using these schemes so don’t be tempted by what may be on offer.  Official guidance on this matter from HMRC is as follows at this link Tax avoidance loan schemes and the loan charge.

If you have not yet declared your interest in settling your loans then you will need to act quickly.  You can find further advice and guidance from HMRC and there are allowances to be able to repay the total owed over a period of time.  You can use the following contacts at HMRC for this matter.

If you need any advice before speaking to HMRC you should speak to your accountant or another reliable source.

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