Loan charges are a description of charges, or rather tax obligations, made against loans considered to represent disguised remuneration.
Together with surcharges, penalties and interest which may be sought under the various tax legislation, this supports the prohibitive measures taken by HMRC to counter tax avoidance and the late or non-payment of tax liabilities.
The loan charge is a method by which HMRC enforces the obligation to pay tax via a charge against sums loaned (which, as a loan, would otherwise not be liable for tax).
Charges against director’s loans
It used to be the case (and continues to be) that disguised remuneration was relatively unsophisticated and was disguised as director’s loans which, whilst not chargeable to tax (as with any loan), were also never repaid (making them income, rather than a loan).
- the director would have the control over the company’s finances to create artificial ways of cancelling the loan at the year-end, or simply writing it off, and thereby obtaining income free of any tax liability.
The charge imposed on all company director’s loans under Section 445 of the Corporation Tax Act 2010 provided that such loans, if due at the year-end, would be subject to a tax charge. Whilst this is not a tax, as it could be reclaimed (if the loan was paid back), it acts as a tax on those who chose to draw their income as director’s loans without repaying them.
Loan charges
The use of loans as a form of avoiding tax liabilities has been extended in recent years by tax schemes often using a loan to conceal or disguise remuneration via offshore employee benefit trusts or via unregulated pension schemes.
From April 2019, a loan charge on all such loans made via tax schemes was imposed in a similar manner to the charge on director’s loans as described above. Read more about these recent legal changes.
Transfer of liability
The issue of greatest concern for these charges is: who should be paying the sums due to HMRC. In most cases, the company is the taxpayer and therefore is liable for all taxes due, including the above loan charges.
However, it has become apparent that (for disguised remuneration schemes) there are some circumstances where the liability should be assigned to the employee/director and these circumstances (and HMRC’s position) has been published as follows
- where the employer is not based in the UK but the employee is.
- until recently, this would require the customer or UK agent to account for PAYE/NIC.
- however, the Finance Acts 2017 have restricted this as unfair (in respect of the loan charge) and accordingly the liability becomes the employee’s, who would have to account for it in their self-assessment return.
- the employer is unable to pay.
- current PAYE regulations provide HMRC with the power to transfer any or all PAYE obligations from employer to employee.
- historically this was not commonly exercised, but we understand HMRC will seek to make use of this power in respect of all tax obligations, including PAYE and the loan charge (but not National Insurance).
- this may become more prevalent where a company has been placed into insolvency proceedings.
- the Employer is dissolved or does not exist
- In this scenario the employee will be liable to report the income as self-assessed earnings via the usual self-assessment return applicable to all individuals who are not employees.
The risk of an employer being placed into insolvency and then HMRC seeking to transfer the PAYE liability (which may go back some years) and the loan charge to an employee is of grave concern but appears to offer the most threat to directors.
At Francis Wilks & Jones we are able to assist with any legal matters arising in respect of your tax liability and particularly with regard to claims out of insolvency or claims for breaches of a director’s fiduciary duties. Please call any member of our tax disputes team for help today.
