If your company or directors are threatened with an HMRC loan charge, we have the expert team to help. We regularly deal with these types of claim. Our team is led by accountant and lawyer Stephen Downie and assisted by Andy Lynch formerly 18 years working for the investigations team at HMRC. Don't settle for second best. Call us today.
HMRC loan charge – an 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. Our Partner, Stephen Downie, has written the comprehensive guide to the application of loan charge legislation for Lexis Nexis.
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.
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
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).
HMRC loan charge – FAQs
What is the HMRC Loan charge?
The Loan Charge is a measure introduced by the UK government to tackle what is referred to as “disguised remuneration” schemes. These schemes involve individuals receiving the bulk of their income in the form of loan, usually from offshore trusts, commonly often known as Employee Benefit Trusts (EBTs).
In the UK loans are not taxable therefore individuals used such schemes to avoid income tax and National Insurance contributions on the majority of their income.
These arrangements were successfully challenged in the courts by HMRC, with the Supreme Court ultimately ruling that such arrangements were ‘disguised remuneration‘.
- The Loan Charge was introduced in the Finance (No. 2) Act 2017 and became effective from 5 April 2019. It applies to loans made on or after 6 April 1999 that were still outstanding on 5 April 2019, and for loans made before 6 April 1999 if they were still being used in a similar manner on 5 April 2019.
- The charge is designed to treat these loans as income, thus subjecting them to income tax and National Insurance contributions. It applies to both individuals who used these schemes and businesses that used them to remunerate their employees, including self-employed individuals who also used such arrangements.
- The impact of the Loan Charge can be significant for taxpayers who have used such arrangements and those affected can face substantial tax liabilities, as the Loan Charge requires the taxpayer to calculate the income that should have been subject to tax and pay the subsequent liability with interest. This can result in significant financial stress for individuals, and businesses.
- The implementation of the Charge has created a great deal of controversy and debate, with critics arguing that it unfairly targets individuals who may have been advised by professionals unaware of the potential tax implications of these arrangements. This controversy has resulted parliamentary inquiries and public consultations, resulting in some and concessions to the taxpayer.
If you or your business are potentially affected by the Loan Charge, our expert team at FWJ can help you understand the implications of the loan charge and help you navigate a way through it. Phone us today.
What is an HMRC Loan Charge Settlement?
The legislation governing the HMRC Loan Charge in England and Wales is primarily contained in the Finance (No. 2) Act 2017(‘the Act’). This act introduced the Loan Charge provisions and sets out the legal framework for addressing disguised remuneration schemes.
- The Act received royal assent on 16 November 2017 and came into effect on 5 April 2019. It applies to loans made on or after 6 April 1999 that were still outstanding on 5 April 2019. Additionally, loans made before 6 April 1999 may also fall within the scope of the Loan Charge if they were still being used in a similar manner on 5 April 2019.
- This legislation enables HMRC to treat these loans as disguised renumeration and therefore taxable. It also includes provisions for calculating the loan charge amount, determining the relevant tax years, and specifying the interest charges that may apply.
- A HMRC Loan Charge settlement is the process whereby taxpayers affected by the charge can reach an agreement with HM Revenue & Customs (HMRC) to settle their tax liabilities in relation to their participation in disguised remuneration schemes. More recently, HMRC has recognised the potential financial impact and concerns raised by taxpayers and is offering more favourable settlement options than previously offered.
The specifics of the settlement process, including eligibility criteria, deadlines, and available options, will depend on individual circumstances, together with any updates or concessions made by the HMRC. Our expert team at FWJ, are dealing with such issues on a daily basis on behalf of our clients and use their experience in this regard to their great benefit.
What is a regulation 80 determination in the context of an HMRC Loan Charge?
A Regulation 80 determination, in the context of the HMRC Loan Charge, refers to a specific provision under the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682). This provision grants HM Revenue & Customs (HMRC) the authority to issue determinations to recover unpaid income tax and National Insurance contributions (NICs) from employers or third parties.
In the context of the Loan Charge, if an individual participated in a disguised remuneration scheme and their employer or a third party provided them with a loan, HMRC may issue a Regulation 80 determination to recover the income tax and National Insurance Contributions NICs that should have been deducted from the individual’s earnings.
Regulation 80 determinations are typically used when HMRC believes that an employer or third party failed to operate the correct PAYE (Pay As You Earn) procedures or withheld taxes and NICs on behalf of employees. It allows HMRC to assess and recover the unpaid amounts directly from the employer or third party, rather than pursuing the individuals involved.
Under the Loan Charge legislation, if an individual’s tax liability is not settled, HMRC can issue Regulation 80 determinations to the employers or third parties involved in the scheme. This shifts the responsibility for paying the unpaid taxes and NICs to the party that provided the loan or was responsible for the remuneration arrangements.
Can I appeal a regulation 80 determination for an HMRC Loan Charge?
Yes, it is possible to appeal, and the process typically involves the following steps:
- Notice of Appeal. The taxpayer must submit a written notice of appeal to HMRC within 30 days from the date of the Regulation 80 determination. The notice should specify the grounds for the appeal and provide supporting evidence or arguments.
- Review by HMRC. HMRC will review the appeal and consider the grounds and evidence presented. They may also conduct further investigations or request additional information from the appellant.
- Decision by HMRC. HMRC will notify the appellant in writing of their review, this may confirm, amend, or even result in the withdrawal of the Regulation 80 determination. Also, the taxpayer can ask for a further review by an officer not involved in the original decision, should the determination be upheld.
- Tribunal Appeal. If the appellant is dissatisfied with HMRC’s decision, they can appeal to the First-tier Tribunal (Tax Chamber). The appeal must be made within 30 days from the date of HMRC‘s decision or the latest review letter, whichever is the later.
- Tribunal Hearing. The case will be heard by the First-tier Tribunal, where both the appellant and HMRC will present their arguments and evidence. The tribunal will then make an independent decision based on the facts presented and applicable law.
- Further Appeals. If either party is dissatisfied with the First-tier Tribunal’s decision, they can seek permission to appeal to the Upper Tribunal (Tax and Chancery Chamber) and, in some cases, onward to the Court of Appeal and the Supreme Court.
Our team at FWJ are highly experienced in appealing HMRC decisions in most regimes that HMRC regulate, this includes Reg 80 determination, and appeals to the FTT and higher courts.
What are a director’s liabilities in respect of an HMRC Loan Charge Demand?
Directors may have certain liabilities in respect of an HMRC Loan Charge Demand, particularly if they were involved in the decision-making or implementation of a disguised remuneration scheme.
Here are some key aspects to consider regarding director’s liabilities:
- Personal liability. Directors can potentially be personally liable for any outstanding tax liabilities related to the Loan Charge. This typically involves income tax and National Insurance contributions that should have been deducted and remitted on behalf of employees.
- Company liabilities. If the company is unable to meet its tax obligations, HMRC can hold directors personally responsible for the unpaid amounts in certain circumstances. If they believe there are grounds to do so, they will issue a Personal liability Notice against the director.
- Disqualification proceedings. In severe cases of non-compliance or failure to address tax liabilities, and following insolvency, HMRC may request disqualification proceedings be taken against directors under the Company Directors Disqualification Act 1986, which can result in a director being disqualified from acting as a director for a specified period.
- Duty of care and skill. Directors have a legal duty to act with care, skill, and diligence when managing the affairs of the company. Failing to fulfil these duties, particularly in relation to tax compliance, may increase the risk of personal liability.
- Fraudulent or negligent conduct. If a director knowingly participated in a fraudulent scheme or engaged in negligent conduct that led to the non-payment of taxes, they could potentially face legal consequences under various legislation, such as the Taxes Management Act 1970 or the Fraud Act 2006.
- HMRC powers. HMRC has extensive powers to recover tax debts, including the ability to issue demands, issue assessments, enforce payment through legal means, and pursue directors personally for unpaid tax liabilities.
Are my personal assets at risk if HMRC issue a Loan Charge against me?
If you have a Loan Charge claim and fail to settle it, HMRC has certain powers to enforce and collect the debt. These powers are outlined in several pieces of legislation, including the Taxes Management Act 1970 and the Insolvency Act 1986.
While HMRC’s primary focus is recovering the tax owed rather than seizing personal assets, they do have the ability to take further enforcement actions if necessary. Some of the enforcement measures that HMRC can employ include:
County Court Judgments (CCJs). HMRC can obtain a CCJ against an individual for the outstanding tax debt. A CCJ is a legal order issued by the court that states the amount owed and requires payment.
Charging Orders. If HMRC obtains a CCJ, they can apply for a Charging Order against an individual’s property. A Charging Order places a legal charge on the property, which means that if the property is sold, the debt owed to HMRC will be paid from the proceeds.
Order for Sale. In certain circumstances, HMRC can seek an Order for Sale to force the sale of an individual’s property to recover the outstanding debt. This is a more extreme measure and is typically considered as a last resort.
The extent to which personal assets are at risk will depend on various factors, including the amount of the debt, the individual’s financial circumstances, and the specific enforcement actions taken by HMRC. However, at all points of any enforcement by HMRC, there are opportunities to settle, these can include time to pay agreements or even IVA’s (Individual Voluntary arrangements).
If you are concerned about your personal liability, then get in touch with our team today, we can quickly explain your exposure and expertly advise on ways to mitigate it.
“FWJ did precisely what it set out to do. I am extremely grateful for its assistance.”A client who had received a Request for Security from HMRC for a sum that would have caused their company severe financial difficulties. We helped them to have the entire bill withdrawn
I have been doing business with Andy Lynch for over two years now. In that time I have found him to be very knowledgeable in relation to HMRC matters and excellent in explaining them in layman terms.A bonded warehouse owner
At Francis Wilks & Jones our brilliant tax disputes team 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.