An update on the EBT loan charge and actions required by 30 September 2020

The briefing

Firstly, an apology that this week’s tax bite is a little longer than normal!  However, below are some key updates that will be relevant to any clients and advisers who have been affected by the 5 April 2019 loan charge.
 

In this briefing we cover:

  • The impact of the 2019 loan charge review and the changes that have now been made to legislation.
  • A new refund scheme for taxpayers who voluntarily settled with HMRC but are no longer caught by the loan charge.
  • HMRC’s ‘final settlement opportunity’.
  • The upcoming loan charge reporting deadline and new ‘spreading election’

Actions may be required by 30 September 2020 in some cases.  Please read on for further details.

Background

Readers will recall the loan charge was brought in by the Government to tax outstanding loans held with EBTs, EFRBS and similar schemes.  The legislation was highly controversial as it allowed HMRC to tax amounts going back up to 20 years, even where original enquiries had been missed or closed without assessments being raised.  The loan charge was also a fairly ‘sledgehammer’ policy, in that loans were ‘stacked up’ into a single charge that applied on 5 April 2019, thereby increasing the chance of higher tax rates applying.  This is despite the fact that the original loans could have been a collection of much smaller amounts taken out over several tax years.

The Morse Review

Following pressure from MPs in Parliament, industry groups, and the wider professional community (including this firm) the Government appointed one of the UK’s leading civil servants, Sir Amyas Morse, to undertaken an Independent Review.  His report was issued shortly before Christmas 2019 and levelled several criticisms at the Government’s approach.  In particular, Sir Amyas took issue with the fact that the loan charge was being used as a measure to tackle avoidance in respect of arrangements undertaken in years when the legal position (or at least HMRC’s view on how the law operated) was unclear. 

Consequently, the Government agreed that the loan charge would be withdrawn for all loans taken out before 9 December 2010, this being the date on which formal ‘disguised remuneration’ rules were introduced.  In exceptional circumstances loans taken out between 9 December 2010 and 5 April 2016 are also exempt from the loan charge, but only if fully disclosed.  These changes have now been legislated for by Parliament.

Further implications and potential actions required by 30 September 2020

The change in legislation gives rise to some wider implications for particular groups of taxpayers:

1. Refund of voluntary restitution settlements

The Government recognises that there will be some taxpayers who, faced with the threat of the loan charge, agreed to settle with HMRC.  In some cases, settlements were agreed voluntarily for tax years that were otherwise ‘unprotected’ (i.e. because HMRC was out of time to raise assessments).  As a result of the loan charge review, the Government will automatically refund any element of a settlement that was made voluntarily between 16 March 2016 (which is when the loan charge was introduced) and 11 March 2020 where the loan charge would now not apply.

A scheme has now been established, and affected taxpayers should receive a letter by 30 September 2020.  However, we encourage any individuals who settled between these dates to ‘check their tickets’ in case of HMRC oversight.  Claimants have until 30 September 2021 to apply for a refund.

Our understanding is that where refunds are issued there will be no further action taken by HMRC in respect of subsequent action taken to unwind trusts (e.g. the writing off of loans) where this relied upon certain double taxation reliefs a.k.a. ‘settlement credits’ being applied, although we have asked HMRC to confirm this.

2. ‘Final’ settlement opportunity

There will be other taxpayers who had previously registered an interest in settling with HMRC but did not reach agreement.  HMRC has said it will make a ‘final settlement offer’ to these employers/individuals and invite settlement by 30 September 2020.  However, updated guidance issued yesterday suggests that HMRC is, in the main, standing by previous settlement terms.  We are disappointed that the Government has not listened to concerns raised by ourselves and others in relation to aspects of the current settlement opportunity, and in particular:

  • Schemes which had corporation tax deductions denied as a result of a company tax enquiry where HMRC refuses to give relief via the settlement;

  • Refusal to allow offset for benefits in kind that have been declared for years which are technically ‘out of time’;

  • Insistence upon accepting penalties for ‘careless behaviour’ on the basis of limited evidence with no right of appeal;

  • Imposition of inheritance tax charges.

We know that many taxpayers are still willing to settle with HMRC in order to draw a line under historic enquiries, or simply to tidy up their affairs.  However, the withdrawal of the loan charge may offer very limited incentives for individuals to do so when faced with settlement offers that are clearly designed to be punitive. 

We are lobbying Government for a rethink in this area but in the meantime, individuals and employers will want to review their circumstances and weigh up the various options.  The Government has stated that ‘no special terms’ will apply to taxpayers who miss the 30 September 2020 deadline.

3. Loan charge reporting and spreading election

Taxpayers still within the loan charge had the option to submit their 2018/19 return by 31 January 2020, giving a best estimate of the tax due, or file by 30 September 2020.  HMRC has confirmed it will waive any penalties for late filing and late payment provided that the return is now filed by 30 September 2020.  Late payment interest will not be payable on any outstanding tax for the period 1 February 2020 to 30 September 2020, as long as an accurate return is filed, and tax paid or an arrangement made with HMRC to do so, by 30 September 2020.

The Government has also agreed to allow the option of spreading the loan balance over three tax years, this being 2018/19, 2019/20 and 2020/21.  To make this election individuals must complete and submit a loan charge reporting form on or before 30 September 2020.

If you or your clients are affected by the above changes, or would like to discuss any other issues relating to EBT/EFRBS schemes please contact us.

 

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