Loan charge advice for private clients

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Overview

Loan charges are a description of charges, or rather tax obligations, made against loans considered to represent disguised remuneration schemes. 

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). The loan charge is applied to all loans received via a disguised remuneration scheme since 9 December 2010.

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 control over the company’s finances and create artificial ways to cancel the loan at the year-end or to write the loan off, 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 heavily utilised by disguised remuneration schemes using a loan to conceal or disguise remuneration via

• Employee Benefit Trusts (“EBTs”; or
• via unregulated pension schemes, known as Employee Financed Retirement Benefit Schemes (“EFRBS”).

The loan charge was introduced by the Finance Act (No.2) 2017. Its introduction meant that the amount of a loan received by an individual, via a disguised remuneration scheme, was to be treated as taxable income for income tax and national insurance contributions. The loan charge creates a PAYE liability for the employer that has participated in the scheme.

The government announced a review of the loan charge in December 2019, following an independent review of the loan charge policy by Sir Amyas Morse.

• this review led to a number of key changes to how the loan charge would be applied to companies and individuals who have participated in a disguised remuneration scheme;
• for example, it was determined that it would only apply to loans made to individuals after 9 December 2010. Previously, the intention was that the loan charge apply to loans made after 6 April 1999.

However, it is important to note that the independent review confirmed that disguised remuneration schemes were a form of tax avoidance which warranted the application of a loan charge.

Transfer of liability

The issue of greatest concern for these charges is who should pay the sums due to HMRC.  In most cases, the company is the taxpayer and therefore, the company is liable for all taxes due, including the above loan charges.

However, HMRC can transfer liability for PAYE (and in some instances for NIC) plus interest, to a beneficiary of a disguised remuneration scheme, where the correct notices are issued. Steps should be taken to verify that HMRC have followed the correct process to transfer liability from a company to a beneficiary (often a director or employee) of a disguised remuneration scheme.

Whilst traditionally HMRC did not tend to transfer liability to individuals personally, there has been an increase in this practice.

Claims by liquidators

Increasingly, directors of liquidated companies that were involved in a disguised remuneration scheme are finding themselves subject to a claim by both HMRC and the company liquidator.

We have assisted many directors subjected to a claim by both HMRC and the company liquidator (the later being on the basis that a director breached his / her fiduciary duties to the company by allowing the company to participate in a disguised remuneration scheme).

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.

Should you require any assistance, please contact our Director Services team who can discuss such matters with you.

Andy Lynch at FWJ was literally a life saver for me. I ran in to some tax issues with HMRC and I suffer from mental health issues as well so I was a complex case. Andy took his time to professionally and accurately layout my case and assist me with finding a resolution. I researched a lot of tax advisers before making my decision and I am glad I did and relieved that I chose Andy and FWJ.

Chris Kitchen