Loan charge victims who have not yet agreed a settlement or filed their tax return could face harsh penalties

The tens of thousands of contractors who have previously used a disguised remuneration loan scheme had until Wednesday 30th September to report and arrange retrospective loan charge tax payments. 

Disguised remuneration loans are arrangements where individuals receive a non-repayable loan instead of income. These loans were often bought into by contractors who had been told by promoters that they did not need to pay income tax and national insurance contributions on their earnings. 

However, it’s thought many contractors may not have known about the loan arrangements or used them based on the understanding that they were compliant, following advice from the businesses recommending them. 

It has led to what experts have described as a “profound injustice”, with thousands of contractors facing huge retrospective tax bills.

Loan charge introduced to tackle tax avoidance schemes

The loan charge was introduced in the 2016 Budget with the aim of tackling loan schemes, which are considered non-compliant disguised remuneration arrangements. It’s a tax charge on these loans taken out on or after 9 December 2010 and outstanding on 5 April 2019.

HMRC expected contractors subject to the loan charge to have filed at least their self-assessment tax return for the 2018-2019 year (due 31 January 2020), along with the full details of any outstanding remuneration loans. The tax office also said it will waive any penalties for late filing if a contractor’s self-assessment was filed by 30 September 2020.

Alternatively, those impacted by the loan charge could also arrange a settlement or payment plan with HMRC, but this also had to be organised by 30 September 2020. 

Given the deadline has now passed, what does this mean for contractors who have failed to submit it on their tax forms or didn’t even know they were subject to the charge?

Contractors could face harsh interest on payments

Well, HMRC has said in its guidance that it will “consider waiving late filing and payment penalties on a case-by-case basis” for anything filed after 30 September 2020. It also said that any decision on charging “inaccuracy penalties” after this date will also be made on each individual case.

However, for cases where HMRC refuses to waive the fees for filing after the deadline, contractors could be faced with interest charged from 1 February 2020 on top of accrued late payment penalties.

The tax office also warned contractors: “If you do not pay the 2019 to 2020 payments on account or agree a payment arrangement with us by 31 January 2021, interest will be charged on 50 per cent of the payment due from 1 February 2020 and on the other 50 per cent from 1 August 2020.”

Possible exception?

Reacting to the passing of the deadline, the tax campaign group, the Low Incomes Tax Reforms Group, has said there is an exception.

The group told What Investment that for loans made on or after 9 December 2010 and before 6 April 2016, if HMRC was made aware that the disguised remuneration scheme was used, but had not taken any action to protect their “assessing position” – either by opening an enquiry or issuing a tax assessment – by 5 April 2019, then the contractor is exempt.

For more on the loan charge, which has been described as an “injustice that is a stain on this country and our democracy” by one lobbyist, please read this recent Contractor Weekly article.