TAX QUESTION OF THE WEEK: 2019 Loan Charge and Settlement

TAX QUESTION OF THE WEEK: 2019 Loan Charge and Settlement

Q- My client took part in Employee Benefit Trust (“EBT”) planning, and HMRC missed the windows to open an enquiry on a PAYE/NIC basis, as well as issue any associated penalties. HMRC did raise a Corporation Tax (“CT”) enquiry into the original CT deduction claimed, which remains open.  They have been invited to settle on the basis of voluntary restitution before 31st May 2018 otherwise there is the possibility of a Part 7A charge applying in April 2019. Why should my client consider this?

A- My client should strongly consider this opportunity, as in the current climate it may be the best way forwards for the client. In fact, HMRC is strongly encouraging settlement options to clients.The part 7A charge referred to is more commonly known as the ‘2019 loan charge’, which was introduced to target all outstanding loans (as at 5th April 2019), which were received through ‘a disguised remuneration tax avoidance scheme’.

HMRC considers most EBT planning to fall within this and intends to charge PAYE/NIC on the principal of outstanding loans.The only way to avoid the loan charge is to either settle with HMRC or repay the loan. HMRC has put in place provisions to ensure that only actual repayment is sufficient. Further, any other steps taken now in relation to the EBT will be subject to the Disguised Remuneration legislation in Part 7.

If my client registers to settle by 31st May, they will be able to use HMRC’s terms of settlements. Detailed settlement terms we also pushed on 7th November 2017 and are available on the Gov website. Put simply my client would pay PAYE/NIC on the contribution as per the years in which they were made.

The company would be able to keep the original CT deduction, and may even get a further CT deduction for the tax it pays now. If the individual does not reimburse the company the PAYE/NIC paid, then a further s222 ITEPA 2003 charge will be applied.

However, there will be a credit for any tax paid over the years for beneficial loans as benefit in kinds. (Where there is either an overpayment claim in place or the client was within time to make such a claim). There will also be no late payment interest where HMRC has not opened enquiries as the settlement will be made on the basis of Voluntary Restitution.

Inheritance Tax charges will apply, but most clients choose to terminate the trust and pay an exit charge. HMRC can include this within their settlement offer, if required. Similar options are also available where the employer is no longer in a position to settle, and to the many taxpayers who used Contractor Loan Schemes, which are also caught by the 2019 loan charge.

There is also the interaction with Accelerated Payment Notices, and potential Follower Notices to consider where HMRC has protected their position. 31st May is swiftly approaching, and it would be prudent to register my client’s interest as soon as possible if they are interested in settling.