Lee Sharpe considers the latest update on the Loan Charge, announced 20 January 2020.
HMRC has updated its guidance on the Loan Charge.
There is now also draft legislation to implement the government’s changes in policy, following Sir Morse’s report, which we covered in some detail in Loan Charge Independent Review: Some Meat But No Blood.
Initial findings are as follows
- The draft legislation intends that the election to spread the Loan Charge over the 3 tax years 2018/19 – 2020/21 be irrevocable
- However, HMRC says that paperwork to give effect to the spreading election will not be issued until April 2020 – and that this paperwork will have to be submitted by 30 September even if a return that incorporates a spreading election has already been filed
- HMRC’s guidance for dealing with 2010/11 specifically, (being the tax year that straddles the watershed date of 9 December 2010) is that, depending on how much information the taxpayer now holds, loans may be apportioned on a just and reasonable basis, in order to determine how the loan balance accumulated over that tax year:
“For example, it may be just and reasonable to apportion two-thirds of your total 2010 to 2011 loan balance to pre 9 December 2010 (April to December) [so that it is now excluded from the Loan Charge under the revised regime] and one-third post 9 December 2010, if you received equal payments throughout the tax year.”
Of course HMRC has to step lightly here: the tax year in question is well outside the usual timeframe for holding books and records (and the issue would be moot if the tax year were already under enquiry)
Note that the draft legislation specifically provides for HMRC to be able to grant more time beyond 30 September 2020 for a taxpayer to make an election – if HMRC wants to.
Loan Charge Reduced where Underlying Liability Disclosed but Unenforceable
Where a taxpayer hopes to avoid the Loan Charge beyond 9 December 2010 because he or she had notified HMRC of relevant arrangements but HMRC had failed to open an enquiry to keep the tax year “open”, there are lots of references to a need for there to have been “reasonable disclosure” with it basically being left to HMRC to interpret what this means, in the implementation.
In its guidance, HMRC says:
“The disclosure must have contained sufficient information so that it was apparent that a tax liability may have arisen as a result of the loan arrangement. Where the nature of the loan arrangement was such that only by considering its implications over more than one year could it have become apparent that a tax liability arose…”
Hmm. If only we’d had X-Men levels of clairvoyance, or perhaps legal acumen, to be able to predict in 2011, et seq., that HMRC would finally win at the Supreme Court in 2017, and retroactive legislation would be introduced via F(No.2) A 2017 Sch 11.
If anything, the legislation is even more demanding, because it seems to require that “a reasonable case could be made” that the taxpayer was chargeable to Income Tax in that year for which relief is now effectively being sought. But by whose measure? Now, with hindsight? Then? Does the tax return need to have said, “Dear Hector, please open an enquiry because, deep down inside, I know this is taxable – or, at least, several years from now, you will have amassed sufficient ammunition to be able to argue that this arrangement is/will be found to have been taxable even though, so far, you’ve been losing cases hand over fist”?
Calling all Cynics
Finally, I would just mention that the draft legislation seems to have been devised in a way that it could be subverted to allow the liability to be attributed or moved to a later, non-qualifying year (i.e., post-2015/16).
The Explanatory Note to the legislation basically says that relief will be given where reasonable disclosure has been made and HMRC had not sought recovery in relation to that tax year by 5 April 2019, but that no relief will be given if HMRC can attribute the loan / movement to a different tax year and HMRC had sought recovery for that different tax year by 5 April 2019.
This might seem reasonable on the basis that HMRC is trying to prevent taxpayers from exploiting its new-found largesse by trying to cram otherwise ineligible loans into tax years up to 2015/16, and where the taxpayer had made adequate disclosure at the time. (And it also allows HMRC to do the opposite).
But that is not what the legislation actually says.
The legislation effectively says no relief is due if (all of the above) OR if the loan, etc., can be attributed to a non-qualifying year – one past 2015/16. Again, that might once have seemed reasonable in happier times. But recent years have borne witness to HMRC’s unbridled predilection for retroactive taxation, where liabilities can be magick’d into existence in later years with wing of bat, eye of newt, and a dusting of unicorn poop.
This may be perceived as unnecessarily alarmist, but to quote the government n its own response,
“The government will ensure [that] people who entered into Disguised Remuneration avoidance schemes before 9 December 2010 will still pay the tax due and maker their contribution to funding public services. Further detail will be announced at the Budget.”
Given that this promise kind of undermines the whole point of the proposed reforms under the Loan Charge Independent Review, which on the surface the UK Government purports to accept, some sort of legislative crowbar would seem now to be required to make good on that promise, and I detect a whiff of Son of Loan Charge: more offensive and worse jokes than the original.
And, finally finally, note also that HMRC has – so far – omitted to give monetary values in terms of how the recent changes will affect tax foregone by the Treasury. It has included an estimate of the number of taxpayers who will benefit, but not how much they will have saved.
It leaves me to muse whether it might just work out to be only £13,000 per taxpayer as claimed quite recently, or more like the amount of £64,000 per head that HMRC originally implied before it started to realise that not everyone was a fan of the Loan Charge? Perhaps this will be clarified in Budget 2020, or perhaps it will be smudged into other measures.