HMRC Loan Charge Reforms

HMRC Loan Charge Reforms

"HMRC Loan Charge Reforms –charge policy that was introduced in 2016, The article then discusses a report conducted on the policy by Sir Amyas Morse."

In this article, we will look into several loan charge reforms planned by the HMRC, which were backed by an independent conducted by SIR Amyas Morse. We will go into detail describing precisely what the reforms are and the HMRC’s main aims for these reforms.

What is the loan charge legislation?

The loan charge legislation in question relates to an anti-tax avoidance measure that was introduced in the Finance Act 2016. The proposal aimed to reduce tax loss to the exchequer through the use of ‘disguised remuneration’ schemes. This schemes involved individuals having the majority of the salaries replaced with loans. Employers did not pay the loans, but instead, by a third party such as an “employee benefit trust” funded by the employer, important the loans were structured in a way that they would in all likelihood never be repaid. Individuals did this as it would mean that they would no longer be subject to income tax or national insurance contribution as loan proceeds don’t count as income. The loan charge legislation required anyone who took out similarly structured loans since 1999 had to pay back income tax on the loans in one go. People affected by the legislation were encouraged to enter into negations to settle past taxes under the assumption that the income from the “loans” taken out was taxable as income. If said individuals agreed to these settlements, then they would not be subjected a loan charge.

The reasoning for the review into loan charge

The independent review that was conducted by Sir Amyas Morse has recommended several revisions to the highly controversial loan charge legislation. When performing the review Sir Amyas Morse received feedback from over 7000 individuals who were affected by the policy, as well as from MPs, experts, campaigners and tax professionals. His reasoning for conducting the said review was that it was imperative that the tax system is fair and reasonable. While admitting this kind of tax avoidance schemes needed to be addressed, he stressed that the government/HMRC needed to act proportionately and responsibly, which he argued that the loan charge legislation failed to.

Key recommended changes

The most significant change that Morse’s review recommended was that it shouldn’t apply to loans that were made before 9 December 2010, and should only apply to loans made after this date.

Another alteration that was brought up was the scraping of the idea that the owed taxes had to be repaid in one lump sum. He recommended that taxpayers should have the opportunity to split the payments over several tax years. This would be huge in swaying public opinion that the legislation is incredibly harsh on taxpayers. It would also be more comfortable for taxpayers to make the payment which is a benefit to the HMRC as they would be able to receive the owed taxes from people who would otherwise struggle to be able to make the lump sum payments.

Adding on to the previous point, Morse recommended that the HMRC should honour a prior commitment they had made to protect “vulnerable taxpayers”. He stated that the tax authority shouldn’t force taxpayers to sell primary homes, push them to bankruptcy or make them pay more than 50% of their disposable income. This both makes the tax payments more manageable for taxpayers to bear and has the economic benefit of allowing more money to be spent by said individuals.

Finally, Morse’s recommended that the HMRC should introduce a ten-year tax write off to the tax payments on these loans.

HMRC response

HMRC has appeared to acknowledge that the current state of the loan charge legislation is flawed even taking many of the recommendations on board though others have been ignored. An example of some of the adopted recommendation would include the fact that HMRC is offering refunds on voluntary payments for loans made before 9 December 2010. The HMRC also provided some flexibility on outstanding loan balances, allowing taxpayers who would struggle to make the payments in a lump sum payment over multiple years.

The HMRC has also made plans to fund external body to offer aid to taxpayers who are struggling to make the payments or are unable to pay their debts. Further in line with this, the HMRC have released an Income and Expenditure form to give further transparency on how the HMRC has created the time to pay arrangements.

The HMRC did reject Morse’s recommendation that the HMRC should enact a tax write-off after ten years. Their reasoning for this being that they believed that this would provide an unfair for those who used DR avoidance schemes and act as the deterrent to pay off the debt.

HMRC Loan Charge article – In the first article I discuss the HMRC loan charge policy that was introduced in 2016, I outline exactly what the policy entails  and go into detail about the criticisms. The article then discusses a report conducted on the policy by Sir Amyas Morse outline the recommended reforms and the reasons why these reforms are needed. Finally I go into the HMRC response to the report and which recommendations they enacted and going into why they enacted certain reforms and reasons for why they rejected others. I have used quotes from both Morse and the HMRC to back up points made in the article.