Loan charge tax return demand unhelpful, says LITRG

LITRG is calling on HMRC to consider using their powers to remove the requirement that those in the loan charge settlement process – who have not settled by 31 January 2020 – should have to file a tax return to report the charge, only to amend it to remove the charge once settlement is reached.

HMRC’s outlined their expectations in guidance added silently to GOV.UK on the same day as the Government’s letter to Sir Amyas Morse asking him to postpone the release of his loan charge review findings until after the general election.1

LITRG points to the great risk of taxpayers getting their tax returns wrong because of this new requirement, particularly unrepresented taxpayers, and those who have not had to file a tax return before. LITRG also suggest that if HMRC could use their powers to remove the requirement it would save considerable effort all round – including for HMRC and advisers – who will already be under huge pressure around the tax return deadline (31 January 2020).

Victoria Todd, Head of the LITRG Team, said:

“The delay in publishing the review findings, although inevitable given the general election, is causing additional uncertainty for those in the loan charge settlement process.

“The requirement to file a tax return to report the loan charge by 31 January 2020 risks making the situation much worse, particularly for those not already in Self Assessment. We recognise that the delay to the loan charge review is not the fault of HMRC – but neither is it the fault of those already in the settlement process.

“We understand that HMRC have paused proactive work on settlement cases, pending the outcome of the review, which effectively makes it difficult, if not impossible, for taxpayers to make the 31 January 2020 settlement deadline.

“While we appreciate that there is normally an obligation to file a tax return to report new charges, such as the loan charge, the combination of a settlement process which is time-consuming and new to many of those involved, a Government-initiated review which may recommend changes to the charge, and a general election adding new delay to the resolution of all this, are a unique and unforeseeable set of circumstances which calls for the exercise of discretion.

“We are concerned at this development because filing a tax return, if you have never done one before, can be a daunting and complex task. Even if the tax return is done correctly, it has the potential to trigger many other tax consequences that may quickly spiral out of control and may be difficult for both the taxpayer and HMRC to deal with.

“A debt will be created and the taxpayer will be left having to decide whether to pay it and ask for a refund later based on their amended return – or not pay it and risk late payment interest and penalties. In addition, other matters can arise, such as liability for the High Income Child Benefit Charge. HMRC assume these consequences will be dealt with when an amended return is submitted, but what if the taxpayer does not manage to file an amended tax return, correctly, or even at all?

“We call on HMRC to consider whether they can use their discretionary powers to remove this requirement to file a tax return for those in the process of settling the loan charge; this is the right thing to do, for fairness, for simplicity and for the proper administration of taxes.”

Notes for editors

1. HMRC’s new guidance says, for those already in the settlement process, that ‘HMRC recognise you may want to wait for the government’s response to the review before finalising your settlement. You will need to report the loan charge on your tax return if your settlement is not finalised by 31 January 2020. Reporting your loan charge will not prevent you finalising your settlement. Once your settlement is finalised you can amend your tax return if necessary.

2. The 2019 loan charge is an anti-avoidance measure, introduced in Finance Act 2016 to address the tax loss to the Exchequer from a variety of ‘disguised remuneration’ schemes. Under such schemes, individuals were paid in the form of loans, replacing part or all of their salary. Usually these loans were provided not by the employer, but by a third party such as an ‘employee benefit trust’ funded by the employer; and critically, the loans were structured so that they were unlikely ever to be paid back. This was done because loan proceeds, unlike salary, are not normally income, and therefore are not subject to income tax or National Insurance (employee or employer).

Under the loan charge legislation, which was approved by Parliament and which HMRC are tasked with administering, any loans taken out in such circumstances since 1999 and still outstanding on 5 April 2019 became taxable as income in one go on that date. In the period up to 5 April 2019, those affected were encouraged to enter into negotiations to settle past tax liabilities on the basis that the ‘loans’ were taxable as income in the years they were taken out. Those agreeing settlements would not be subject to the loan charge.

More information on the loan charge is here.

3. Low Incomes Tax Reform Group

The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

Contact: Hamant Verma, External Relations Officer, 0207 340 2702

Out of hours contact: George Crozier, 07740 477 374)