Directors may be entitled to a refund of payments made in settlement of the HMRC loan charge
Following an independent review of HMRC’s loan charge the UK Government has announced that there will be a number of changes to the loan charge, which in some cases will include repayment.
Not only will some directors be able to claim back payments made in settlement, others will be able to take advantage of more flexible ways to pay.
In brief, the notable changes are:
the loan charge will not apply to outstanding loans made before 9 December 2010
the loan charge will not apply to outstanding loans made in any tax years between 9 December 2010 and before 6 April 2016 where the avoidance scheme use was fully disclosed to HMRC and HMRC did not take action (for example, opening an enquiry); and
people can now elect to spread the amount of their outstanding loan balance evenly across 3 tax years
In cases where the loan charge does not apply, HMRC will refund voluntary payments made under settlement agreement reached since March 2016.
In this blog, we consider the practical implications of these changes for directors and also what impact they will have on claims against directors in the context of insolvency.
What does this mean for directors?
For those that have paid monies in settlement of the loan charge the changes should result in a refund and for others the changes will relieve them of liability to pay the charge.
However whilst the loan charge will not apply to outstanding loans made before 9 December 2010 or in any tax years between 9 December 2010 and before 6 April 2016 (provided the scheme was fully disclosed) the underlying tax liability is still payable.
The change does not therefore absolve the employer or employee completely, and tax that should have been paid will still need to be accounted for.
It is also important to note that those who are entitled to a refund will have to wait for the Government to enact legislation to enable HMRC to process the payment. This is expected to be Summer 2020.
There is limited information on what might amount to full disclosure such that the loan charge does not apply, and further guidance will follow. However it is clear that HMRC must have been provided with sufficient information to enable it to identify the nature of the arrangement and to conclude that an income tax liability arose.
Other points worthy of note are that directors can now elect to spread the amount of their outstanding loan balance evenly across 3 tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021. This may mean that the loan balance is not subject to higher rates of tax.
Further, if a director does not have disposable assets and earns less than £50,000, HMRC will agree Time to Pay arrangements for a minimum of 5 years. And, if a director earns less than £30,000, HMRC will agree a time to pay arrangement for a minimum of 7 years.
Those who need time to pay will also have to pay no more than 50% of their disposable income, unless they have a very high level of disposable income.
Also, no one will be forced to sell their main residence or access their pension pot to settle outstanding charges.
What does this mean for insolvency practitioners?
In our previous blog we looked at the interaction of the loan charge and potential insolvency claims against directors.
Claims by insolvency holders are distinct from any claim that HMRC may have under the loan charge legislation, albeit that the claims can arise from the same facts.
Whilst the review clarifies that in some circumstances the loan charge does not apply, this does not mean prevent an office holder from bringing a claim under the Insolvency legislation.
If a director has acted in breach of duty and caused loss to the company as a consequence of transferring company money into an EBT or if the EBT amounts to a transaction at an undervalue or a transaction defrauding creditors, there may still be a claim (assuming it is not time barred).
That said; the conclusion that the law only became clear in December 2010 could help support a director seeking to defend a misfeasance claim under s1157 of the Companies Act by enabling a director to argue that they acted honestly and reasonably and should be excused.
One point that is uncertain is the impact on claims that are already on foot. If the change to the loan charge now gives directors a defence under s1157 which they did not have previously, who is responsible for the potential wasted costs of that application if it now has to be discontinued?
Further reading: The Loan Charge – a brief history
The loan charge was introduced to dissuade employers from using loan schemes to pay its employees through an employee benefit trust (“EBT”). EBTs were structured in such a way that payments to employees through EBTs were loans, thereby avoiding PAYE and income tax on payments that might otherwise have been paid as a salary.
However, the terms of the loan meant that the loan was never or was unlikely to be repaid and in reality the payments were disguised remuneration and simply a mechanism to avoid paying tax.
HMRC initially challenged the use of EBTs through issuing Advance Payment Notices (APNs) and Regulation 80 Notices (Notices) against the employers for the amount of unpaid income tax and national insurance contributions on payments into the EBTs.
Following lengthy and unsuccessful challenges by employers to the APNs and Notices (see, the Rangers FC case,  UKSC 45) HMRC could pursue employers for unpaid tax. However, HMRC had no recourse against the employees who had receiving the benefit of payments made through the EBTs.
Accordingly, the disguised remuneration loan charge was introduced by Schedule 11 to the Finance Act (No 2) 2019. This provided a mechanism for HMRC to directly pursue beneficiaries of the EBTs for unpaid tax. The loan charge came into force on 5 April 2019 and applied retrospectively to loans made on or after 6 April 1999 . Since then it has faced increasing criticism, leading to the Government requesting an independent review.
Under the loan charge, HMRC raise an assessment against an employer for the amount of income tax and employee national insurance contributions that would have otherwise been payable but avoided through use of an EBT. If the employer is unable to settle this liability, HMRC is able to transfer the liability from the employer to the employee.
Employers and employees were given a period of time to settle their tax affairs with HMRC, failing which the loan charge would be payable.
In an insolvent situation, the employer is unlikely to be in a position to pay in full or at all and liability will pass to the employee. In order to avoid the loan charge, directors of insolvent companies (where a disguised remuneration scheme was used) have sought to agree settlement terms with HMRC. Some have paid the settlement in full, others have agreed payment terms or are still negotiating.
The independent review was commissioned to consider the fairness of the loan charge and impact on individuals. Full details of the Government’s package of changes can be read here.