The ongoing shifts in the tax avoidance landscape continue to underline the Government’s commitment to tackling the issue. With strengthened sanctions and deterrents, the changes have expanded both HMRC’s capabilities and its reach.
A large number of companies and individuals have now experienced these changes first-hand, having received accelerated payment notices (APN’s), follower and closure notices, penalties and Regulation 80 determinations, all tools for HMRC to recover unpaid tax. However, the introduction of the ‘Loan Charge’ legislation, effective from 5 April onwards, promises a paradigm shift in addressing this issue.
The Loan Charge will work by requiring that any disguised remuneration loans are notifiable, and by adding together all outstanding loans, and other scheme variants usually involving a financial instrument, and taxing them as income in one year. The scope, as it currently stands, captures all relevant items over the last 20 years, and gives no allowance for whether a tax year remains subject to an assessment or open enquiry, or indeed is now closed.
As widely reported, the nature and scope of the legislation is being challenged and has come in for widespread criticism. The House of Lords and a cross-party group of MPs have questioned its breath, and HM Treasury has conceded to a review of the impact of the loan charge. This review is due to report no later than 30th March, only marginally before the legislation takes effect, and it remains to be seen whether any changes will be recommended and implemented as a result.
HMRC has estimated that the Loan Charge will affect some 50,000 people. However, this figure doesn’t account for family members, dependents or, in the case of a scheme implemented within a company, its employees. More than likely, the number affected will be significantly higher.
It’s reported that over 26,000 individuals have contacted HMRC to seek to settle their liabilities. Spokespeople at HMRC have openly said that they wish to make it as easy as possible to those affected to settle, and as a result, are prepared to consider significant periods within which people can repay the debt. In the vast majority of cases, we are seeing substantial six-figure liabilities and more. In terms of settlements, it is not as simple as the calculations only taking into account ‘pay as you earn’ (PAYE) and national insurance contributions (NIC). Consideration also has to be given to any other tax liabilities that arise, to address the liability of making good the debt to a company, or the tax on the benefit payable to the director, and of course the application of inheritance tax that is payable upon the writing off of the outstanding loans.
What is evident from the developments is that these measures result in businesses and individuals facing significant debts. Whilst approaching HMRC for settlement is discretionary, the application of the Loan Charge is mandatory.
Those affected as a result face significant solvency risks, both in their businesses, and on an individual basis, and many find themselves in a precarious financial situation. Furthermore, if a company cannot pay the loan charge then HMRC will seek to transfer the employee element of the liability to the individuals who benefitted, spreading the burden further.
For any business or individual affected by the Loan Charge, it is essential that they obtain appropriate advice at the earliest opportunity, in order to understand the impact upon them, and all the options open to them, to help them reach an informed decision.