Settlement and the Loan Charge

22nd May, 2020

Settlement and the Loan Charge

Settlement letters

Having been delayed by the Morse Report and, most recently, by staff being diverted to COVID-19 activity, we are starting to see people receive settlement packs land on their doorstep with 30 days given to confirm they wish to proceed.  Understandably, that creates panic as the pressure to settle escalates and confusion as to how the Morse Report affects the figures.  It also raises questions around the years that are to be included following the review.

The single biggest cause of confusion may be that the settlement packs are including loans prior to 9 December 2010.  That surely cannot be right, can it, given that the findings of the Morse report which were accepted by Government was that the Loan Charge would not apply to loans prior to that date?  So, are HMRC pulling a fast one?

To answer that question, you have to go back to the very principles of what ‘settling’ is and dispel some of the myths and misunderstandings that are out there.

What is a settlement payment?

Firstly, the settlement is not payment of the Loan Charge. In fact, it is the complete opposite in most cases. Instead, it is a settlement to ensure that the more punitive loan charge, which stacks loans into the 2018/19 tax year, will not apply.  What you are actually settling is the tax that would have been due if the loans received under the arrangement were income in the year that they were received.  For all practical purposes you are accepting that the scheme did not work.

Secondly, whilst the report was clear that imposing the Loan Charge for loans pre 9 December 2010 was not an appropriate response to disguised remuneration schemes, it did not go as far as to say that HMRC should forgive use of these arrangements and accept tax is not due. 

Open years will be pursued

Therefore, if those years are open, or protected in HMRC speak, then HMRC will continue to pursue the enquires and attempt to collect tax they believe is due.  The Morse Report is not authority to force HMRC to close those years with no tax due, or to have APN’s withdrawn. Any notion that HMRC will not pursue open years needs to be dispelled immediately and a decision made as to how you will deal with those years.

You should also keep in mind that paying the Loan Charge is not settling the underlying tax.  Open enquiries will remain just that, with the loan charge being nothing more than an advance payment against any eventual liability.  Therefore, the enquiries still either need to be settled, by agreement or by accepting HMRC’s eventual closure notice, or litigating the scheme through the Courts.

Resolution options

So, whilst the loan charge does not apply to loans prior to the 9 December 2010, you still need to resolve the underlying position. 

If you want immediate finality, then the only means of achieving that is by accepting HMRC’s view that you are liable for the tax. However, if the removal of the Loan Charge means that you now wish to challenge HMRC’s view, that will mean not settling those years and instead appealing the issues to the Courts.

The decision is therefore simple in nature but vastly complex in reality – Do I settle voluntarily, or do I go on to challenge through tribunal?

Whichever you decide, barring any dramatic last-minute Government amendments, the die is cast.  It is time to make decisions given that the cut of date of 30 September 2020 looks to be immovable. That decision will be one which is full of nuance and relative to your own position, regards liability, viability of challenge and personal outlook. WTT is speaking with contractors daily who are faced with this decision and we would be very happy to spend time with you, discussing your options and formulating a practical and personal route forward.

To discuss this with an expert, please contact us on 020 3468 0000 or info@wttconsulting.co.uk for a free no obligation consultation.