Richard Coombs, Tax partner at Bates Weston considers HMRC’s updated guidance on collecting any residual tax due as a result of the loan charge.

I have written several articles regarding the Loan Charge over the years and whilst a large number of clients will now have settled their affairs with HMRC there are still a significant number where the outcome is still uncertain.  One common misconception is that paying the Loan Charge was an alternative to dealing with any open HMRC enquiries into the underlying planning and I have even seen other accountants suggest as much.  I have always said that electing to pay the loan charge was only part of the story where HMRC had open enquiries, as HMRC would most likely want to come back for any tax shortfall or interest on overdue tax in respect of the initial planning.

HMRC have now published their guidance on what they intend to do to collect any additional tax.  The guidance can be accessed here.

HMRC  refer to the additional tax as “Residual Tax” and the guidance states the following:

For open enquiries and assessments relating to loans subject to the loan charge, HMRC will take into account how much loan charge has been paid. Where there is an amount remaining to settle these enquiries and assessments, HMRC refers to this amount as ‘residual tax’. Residual tax is made up of Income Tax, National Insurance contributions and late payment interest.

We will not collect an individual’s residual tax where all the following criteria are met:

  • the loan charge has been paid
  • the average annual income provided to the individual through a disguised remuneration (‘DR’) scheme to the individual is £75,000 or less in each tax year
  • no litigation has been started before a court or tribunal in relation to the residual tax or loan charge

Where these conditions are not met, residual tax will need to be paid to settle open enquiries and assessments for the years in which the loans were made.

What is interesting here is that there does appear to be a reprieve for those who fall below the £75,000 average annual income provided through a DR scheme.  For those clients, paying the loan charge will be sufficient and HMRC will not come after them for any additional amounts.  Those above the £75,000 average  will end up paying additional sums.  The £75,000 seems somewhat arbitrary but one can only assume that it is a cost v benefit decision as to whether it is worth HMRC’s effort to collect the additional tax on smaller clients.

The guidance does throw up some interesting questions, such as what is the position for someone who has elected to spread the loan charge over 3 years – does this new guidance effectively nullify this and mean they will now be liable for the extra in one go?  And what does “paid” mean where a client is perhaps on a time to pay arrangement?  I suspect further guidance will need to be published to clarify these additional questions, but in the meantime if this is something that may affect you, please do get in touch.

Disclaimer: The information contained in this article is generic in nature. You should take no action based upon it without consulting ourselves or an alternative professional advisor. All information correct at time of publication: 1 December 2020