Tax Schemes – New restriction of the 2019 loan charge: implications for professionals

08 Jan 2020

On 20 December 2019, the government announced wide ranging changes to a loan charge - the previous implementation of which has led to an increase in claims against professionals and directors & officers in relation to advice given as to Employee Benefit Trusts (EBTs), contractor loan schemes, and Employee-Financed Retirement Benefit Schemes (EFRBS), collectively known as disguised remuneration arrangements.  

The loan charge, which is widely regarded as draconian and has reportedly even led to a number of suicides, was announced by the government in 2016 in an attempt to tackle the use of disguised remuneration arrangements.  Put at its simplest the legislation provided for any loans outstanding under such schemes to be treated as taxable income for the 2018/19 tax year and taxable as such unless the taxpayer had reached a settlement with HMRC prior to 5 April 2019 on more favourable settlement terms.

The much anticipated announcement restricts the scope of the loan charge so that HMRC can now only go back 10 years when applying the Charge, as opposed to 20 years. Although many taxpayers will still have to pay the charge, the restriction represents some good news for campaigning tax advisers and their clients as it has now been acknowledged that the charge was retrospective and in some cases has caused a great deal of distress to individuals affected.  It is likely to lead to a reduction in the quantum of some existing claims against professionals, although many will remain unaffected.  

What is the loan charge and what tax arrangements does it apply to?

HMRC’s view is that EBTs, EFRBS and contractor loan schemes are tax avoidance arrangements and that those participating should have known from 2010 that such loan arrangements were not an acceptable way of seeking to mitigate tax.  The arrangements typically involve a payment of a loan (often interest free and with the intention that it will never be repaid) to an employee or contractor via third parties (often an off-shore trust) without deduction of PAYE and National Insurance Contributions (NIC) at source.  Government figures suggest that around 50,000 individuals have used these arrangements over the last 20 years, all of whom were previously affected by the loan charge. 

The charge was controversial - in the noughties these schemes were regarded as a fairly “vanilla” form of tax planning, and were, at that time, recommended by many tax specialists as a way for high net worth individuals to avoid paying income tax and NICs.  They were always unpopular with HMRC, which sought to challenge them through the tribunals/courts in the mid to late noughties, but it was not until legislation was announced in 2010 and implemented in 2011, that the tide began to turn in HMRC’s favour.  Even then, providers soon began to design new arrangements (such as EFRBS) in an attempt to circumvent the new legislation. 

Following the long running Glasgow Rangers EBT dispute, the final nail in the coffin came in the 2016 Budget which announced that the Finance (No2) Act 2017 would introduce a loan charge on all such loans taken out after 6 April 1999 (a 20 year period). 

In 2017, HMRC issued notices to thousands of taxpayers (known as follower notices or accelerated payments notices), which urged those who had entered into these types of arrangements to pay the historic income tax and NI plus interest.  In a dual pronged attack, HMRC also provided taxpayers with the opportunity to agree to settle by publishing a Settlement Opportunity on its website in November 2017.  If taxpayers provided the required information prior to 5 April 2019 they were able to settle their tax affairs under favourable settlement terms offered. For those who did not provide the information prior to 5 April 2019, the loan charge applied and those individuals were due to file a tax return by the end of January this year revealing the total loan charge.     

The changes

On 20 December 2019, in response to an independent review carried out by the former Head of the National Audit Office, the Government announced a package of changes which are to be implemented later this year in (yet more) legislation. The two main changes are:

  1.  The loan charge will now only apply to loans made after 9 December 2010.  Previously, HMRC could go back 20 years to loans made from 6 April 1999 so the period has been halved. Many tax experts are asking what happens if their clients reached a settlement with HMRC in respect of pre 2010 arrangements before the changes were announced.  The government has suggested that those individuals may receive a refund, later this year, of some, or all, of the amount paid but the criteria for claiming such a refund is unclear and it is likely to at least 6 months until refunds are processed.  
  2.  For those who have used the arrangements in the last 10 years the loan charge will still apply to loans made between 9 December 2010 and 6 April 2016 except where the avoidance scheme used was fully disclosed to HMRC (presumably in tax returns but this is not clear), and HMRC has then failed to protect its position by taking action, for example, by launching an enquiry within the relevant time period.  This may be good news for those taxpayers who have used these arrangements in the last ten years but have not been contacted by HMRC, however until further guidance is given as to what “action” protects HMRC’s position it is difficult to know how many taxpayers will escape the loan charge in this way.       

Guidance released in recent weeks by HMRC suggests the changes will take 11,000 taxpayers out of the loan charge altogether.

What this means for you: how will this affect claims?

Although this change is good news for claims against professionals relating to older style pre-2010 EBTs, those claims are often statute barred and we have been defending them robustly on limitation grounds in any event. That said, if settlements of any EBT claim are contemplated then it will be important to consider whether the claimant is in a better position now than they were prior to this announcement.  

The impact on post-2010 arrangement claims is less certain as much will depend on how many taxpayers are able to escape the charge; we suspect there will not be many.  Claimants who are still facing high tax bills, interest and penalties are likely to continue attempting claims against professionals (particularly as these claims appear to be being “farmed”) but they will still face significant hurdles on liability and limitation as arguments are strong on these claims due to the retrospective nature of the changes to the tax treatment of such arrangements and the advice usually having been given more than six years ago.

The announcement may also impact claims against directors, as there appears to be an increasing number of claims being brought by liquidators (see recent decisions in Re Vining Sparks UK Ltd and Toone (Liquidator of Implement Consulting Ltd)) in respect of debts for which HMRC had proved in the liquidation. 

Measures will be introduced for those facing the loan charge to spread the payments and users can also defer the filing of their returns and payment of the charge liability until September 2020 if necessary.   However, developments over the next year and investment in a new HMRC team to collect the tax due are likely to crystallise alleged losses on EBT claims. We will be keeping a close eye on those developments and will report on the proposed legislation later this year.

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.

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