Loan Charge 2019 – Government overhauls controversial rule after review
The 2019 Loan Charge, one of the most criticised tax rules to hit the contracting sector has been changed in what is seen as a climb down by Government.
The charge originally impacted anyone who had used a “disguised remuneration” scheme since 1999, but this will now only be backdated to 9th December 2010.
In addition, anyone who disclosed to HMRC that they used such a scheme before the charge was unveiled will also be exempt.
Independent Report into Loan Charge
The review of the Loan Charge – led by former public spending watchdog Sir Amyas Morse – condemned the Government for not getting the “balance right between tackling tax avoidance and protecting the rights of taxpayers”.
Taking effect earlier this year, the charge has been linked to seven suicides and left as many as 50,000 people facing significant tax bills.
It was levied against contractors and freelancers who used disguised remuneration schemes; arrangements where workers were paid their salary as a loan which was never intended to be paid back, as the income from loans was not taxable.
The Treasury did not classify the schemes as tax avoidance until 2010, and many contractors were advised to use the schemes, or told they had to use them to keep their jobs.
As part of plans to crack down on tax avoidance, the Government had planned to retrospectively tax all who had used the scheme, and apply a punitive loan charge on top.
But, these plans drew widespread criticism from MPs and professional bodies after many workers were left with huge retrospective tax bills.
In his report, Sir Amyas said:
“The foundation of our tax system is fairness and where this is undermined through avoidance schemes it is right that these are tackled.
However, in doing so, the government and HMRC must act proportionately and responsibly.
As my review makes clear, the design and delivery of the loan charge didn’t get the balance right between tackling tax avoidance and protecting the rights of taxpayers and, in some cases, has caused serious distress to the individuals affected.
I’m pleased to see the Government commit to act on the recommendations of my review, bringing the loan charge back into line with the wider tax system, better protecting those who are least able to repay and providing certainty for all those affected.”
In response, the Treasury announced that it will drastically reduce the scope of the charge, applying it to loans taken out since 2010, rather than the original date of 1999.
Those who declared their loan on tax returns since 2010 and were not contacted by HMRC will also be exempt from the charge.
The deadline for paying the charge will also be moved from January to September next year, allowing payments to be spread more easily.
It is estimated that these measures could reduce the tax bill for more than 30,000 people, while a further 11,000 will now be totally exempt.
Further changes called for
Despite these concessions, some say they do not go far enough, and that further change to the legislation is needed, to completely remove the retrospective aspect of the charge.
Sir Ed Davey, the now joint caretaker-leader of the Lib Dems and Loan Charge APPG chair, who gave evidence during the review, said:
“There are welcome and significant changes, yet I still believe there remain injustices which will need further changes, including the removal of all aspects of retrospection.”
Know what you are getting into
Despite the Loan Charge, and the publicity surrounding it, disguised remuneration schemes are still on the rise, driven by factors including changes to IR35 and the surging gig economy.
These include arrangements which claim to circumvent the Loan Charge by transferring ownership of shares in a Personal Service Company.
It is more important than ever for contractors and agencies to know who they are dealing with. Schemes posing as umbrella companies promise the earth, but if they sound too good to be true, they usually are.
All legitimate umbrella companies must operate under the same rules laid down by HMRC – avoid any company that tries to tell you differently.
If you are in any doubt, the safest way is to stick to only companies which are accredited members of the Freelancer and Contractors Services Association. You can find a list of them here