New review offers closure on loan charge enquiries

After years of uncertainty for those caught up in HMRC loan charge tax investigations, a new review announced in the Autumn Budget provides hope that this will be resolved. But there are still issues that need to be considered for those caught up in such probes.

HMRC tax investigations can be extremely stressful and upsetting, and can result in individuals having to pay large amounts of money to HMRC. This can be as a result of failing to comply – accidentally or otherwise – with tax legislation.

Loan schemes

One area which has been a focus for HMRC in recent years is loan schemes, through which employees are paid in the form of loans rather than salary. For employees – or self-employed contractors – this avoids paying income tax or National Insurance Contributions (NICs), while employers also do not pay NICs.

Often the loans in question did not come from the employer itself but an employee benefit trust funded by that business, and typically were designed in such a way that they would not be repaid.

Such arrangements, which are no longer common, were used by banks and other financial institutions as a means of paying bonuses, but some umbrella companies also used them to pay people with more modest incomes. Whether such schemes were within the confines of the law is a moot point, but it is no surprise that they became a target for HMRC.

The loan charge itself was introduced in the Finance Act 2016, as part of a wider government push to crack down on tax avoidance schemes. The government claimed it was acting in the interests of taxpayers and to ensure everyone pays their fair share of tax.

The move, though, was not without criticism. The charge works by adding together all outstanding loans and taxing them as income in one year, meaning people are likely to pay tax at higher rates than they would have at the time they were paid in loans. Many employees or contractors have argued they were forced into such arrangements by employers or businesses that made use of their services, and some claim they were ignorant of the tax implications.

In many cases, the money owed and associated interest payments – which add up to significant sums for some individuals – have long since been spent, raising the prospect that those affected could end up in financial difficulty.

New review changes loan charges

In 2019, the government commissioned the Sir Amyas Morse Review into loan charges. This made several changes, including restricting the charges to loans that were made since 9 December 2010, rather than the original remit of 20 years. It also imposed a longer timeframe of three tax years over which payments can be made.

At the Autumn Budget in November, the new Labour government announced there would be a further review of the loan charge, with the aim of “helping to bring the matter to a close for those affected”.

John Lewis, a consultant at Markel Tax, says those who have settled with HMRC since the initial review should continue paying the amounts that have been agreed while the new review is ongoing. “If, however, you have not yet settled with HMRC or you are in the process of doing so, you do have the option of asking for proceedings to be paused while the review is completed,” he says.

Interest rates

Anyone in this position, though, should bear in mind that, starting from 6 April 2025, the interest rate charged on unpaid tax liabilities is increasing by 1.5 percentage points, taking it to the Bank of England base rate plus 4%. The current base rate is 4.75%, with the next decision scheduled for 19 December 2024.

“This interest rate increase also applies to other taxpayers who may have unpaid tax liabilities, such as those currently subject to an HMRC compliance check or those that need to make a disclosure in relation to historic tax irregularities,” he says. “As such, an early payment on account can help decrease the overall amount that will be due at the conclusion of those processes.”

The hope is that the review will bring some final clarity on an issue that has now been rumbling on for eight years. “While many users of the avoidance schemes which give rise to the loan charge will consider this announcement most welcome, those involved also require certainty regarding their tax affairs moving forward, particularly given the toll that the uncertainty and continuing debate has had on their mental health,” says Lewis.

If you require any advice and assistance with any of these issues, please contact Markel Tax to discuss how we can help.