Loan Charge – October Deadline
If you have received any remuneration (i.e. income for services that you have provided to an employer or other hirer) which was disguised as a loan and your employer is based in the UK, and it hasn’t gone into liquidation, the employer should pay the Loan Charge on your behalf this year. The Loan Charge is the tax due across multiple tax years which must be paid in the 2018/19 tax year, and in that respect it’s a lump sum tax payment, albeit made too late to reclaim any personal allowances or tax reliefs that would be due to you.
If your employer is based overseas or has gone into liquidation, then HMRC will recover the Loan Charge from you personally, and you need urgent advice if this is the case.
If the employer has paid the Loan Charge it will report the amount that it paid to clear your taxes as a benefit in kind and it does this by submitting a P11D. The employer will incur NI contributions, but this should not be chargeable to you. However, the amount of tax paid by the employer on your behalf is treated as a benefit by HMRC, i.e. an untaxed amount paid in addition to your salary, and so you will be taxed on that amount. (Some people have the notion that they are being taxed on tax, but that is not the case.)
The so called loans were often paid via a Trust, and some taxpayers are being asked to repay the ‘loans’ with strongly worded letters from the Trust’s solicitors and these are designed to strong arm people into paying up.
THIS IS A RUSE which benefits the scheme provider and your employer, because if you pay up it may run off with the money or at the very least, use your money to pay the Loan Charge to HMRC, but as explained, the tax it pays on your behalf is treated as a taxable benefit. HMRC is making no allowance for people who have paid back ‘loans’to employers or Trusts, and will regardless expect you to pay the tax due on the amounts reported on the P11D submitted by your employer.
If you have not yet informed HMRC that you have received loans in place of employment or self-employment income, to avoid hefty penalties being levied against you personally, you must report any outstanding disguised remuneration loans before 1st October 2019 but be aware that the following is HMRC’s opinion;
Taxpayer: I was unaware that the scheme was unacceptable / I was forced to use the scheme by my employer.
HMRC: It’s an individual’s responsibility to ensure the accuracy of their tax return. People signed up agreeing to be paid partly in salary and mainly through a loan. This would have involved signing agreements, and most people would have been able to see from their payslips that the money was not being taxed. In the majority of cases HMRC will charge no penalties, despite tax having been avoided.
The unfortunate thing is that the payment of the Loan Charge is made in such an unusual way, and assuming that you have received taxable income in the 2018/19 tax year, this means that the majority of the charge as a taxable benefit will probably fall into the higher tax band (40% or 45%), which may not have been the case had you paid tax on your income in the relevant tax year.
Time to pay arrangements are available and you can request a pack from HMRC or via your advisor or accountant. Please get in touch if you are without representation if you have been involved in a loan scheme.
If you are currently in receipt of a low income (under £20,000 p.a.) the Low Incomes Tax Reform Group which receives funding to help taxpayers in need, may be able to help.