Policy paper

Implementation of changes to the loan charge: refunding voluntary restitution

Updated 9 November 2020

Who is likely to be affected

Individuals, companies and employers that fall within the disguised remuneration legislation in respect of employment or trading income and made certain voluntary payments.

General description of the measure

At Budget 2016, the government announced a package of changes to tackle existing and prevent future use of disguised remuneration avoidance schemes. The loan charge was a new charge on disguised remuneration loan balances outstanding at 5 April 2019.

In September 2019, the government commissioned Sir Amyas Morse to conduct an independent review of the loan change (the review). The review was published on 20 December 2019 along with the government’s response. The government announced that it would accept all but one of the review’s recommendations. The recommendations included making changes so that the loan charge:

• will only apply to outstanding loan balances between 9 December 2010 and 5 April 2019 inclusive

• will not apply to loans made in tax years before 2016 to 2017 where a reasonable disclosure of the use of a disguised remuneration avoidance scheme was made within the relevant tax return or, where appropriate, associated documents, and HMRC failed to take any action (an ‘unprotected’ year)

Legislation to implement these, and other recommendations, was published in draft on 20 January 2020.

This measure will require HMRC to introduce an administrative scheme to repay certain voluntary payments (known as ‘voluntary restitution’) paid after 16 March 2016. The recommended refunds cover voluntary restitution in relation to loans made in unprotected years:

• prior to 9 December 2010

• between 9 December 2010 and 5 April 2016, where the scheme user made reasonable disclosure of their scheme but HMRC failed to take action, for example by opening an enquiry

Policy objective

The government recognises that those who voluntarily settled their tax liability on or after 16 March 2016 have complied with their tax obligations under settlement terms designed on the basis of the loan charge applying to all years. This measure will ensure that the tax liability of these taxpayers reflects the decision not to apply the loan charge to unprotected years.

Background to the measure

The government commissioned Sir Amyas Morse to lead the review into the loan charge to determine whether the policy was an appropriate response to the tax avoidance behaviour in question, and to determine whether the changes the government has announced have addressed any legitimate concerns raised, including about affordability of the loan charge for those affected.

Disguised remuneration avoidance schemes are typically used by employers and individuals to avoid Income Tax and National Insurance contributions. These schemes take various forms but they commonly result in a loan from a third party that is on such terms that mean they were never in practice repaid.

Sir Amyas recognised that disguised remuneration schemes are a form of tax avoidance, and that it was right to take action to ensure the tax was collected. The review did not recommend overturning or revoking the loan charge. The government has confirmed that the loan charge will remain in force.

However, the government recognises the concerns raised by the review about the impact of some aspects of the loan charge. Therefore, the government has accepted all but one of the recommendations which mitigate these concerns. This measure will ensure those who have already voluntarily settled their disguised remuneration liability also benefit from the changes to the loan charge.

Detailed proposal

Operative date

The measure will have effect on and after the date of Royal Assent to Finance Bill 2020.

Current law

Finance Act 2011 introduced the employment income provided through third parties rules at Part 7A of ITEPA 2003, commonly referred to as the ‘disguised remuneration rules’.

These rules give rise to an employment income charge on employment income paid through a third party as if it were paid directly to the employee by the employer.

The loan charge is a new income tax charge on individuals, applying to loans made through disguised remuneration schemes after 6 April 1999, which had not been repaid by 5 April 2019. It was introduced in Schedules 11 and 12 to Finance (No. 2) Act 2017 (“Schedules 11 and 12”).

The loan charge provides that where an individual has an outstanding loan balance at 5 April 2019, a relevant step has been taken at that point. This brings all outstanding loans into tax charge in tax year 2018/19.

If taxpayers agreed a contractual settlement with HMRC or repaid their loans by 5 April 2019, in accordance with the terms of repayment set out in Schedules 11 and 12, then they will not have to pay the loan charge and will instead pay the tax due on their earlier year liabilities. If taxpayers failed to take one of these actions by 5 April 2019, their outstanding loan balance is added to their 2018 to 2019 income and is payable in the same period, unless they elect to split their loan balance equally over 3 consecutive years - 2018 to 2019, 2019 to 2020 and 2020 to 2021. They will then receive double taxation relief against liabilities from earlier years.

Contract settlements are entered into by the Commissioners of HMRC exercising their powers under section 5 of the Commissioners for Revenue and Customs Act 2005. A settlement agreement sees a taxpayer reach finality in their dispute with HMRC so there is currently no legislation that enables a refund of amounts paid under the settlement.

Proposed revisions

This legislation introduces new clauses that require HMRC to set up a scheme under which they may make a refund of a ‘qualifying amount’ paid, or waive a qualifying amount due to be paid, under a ‘qualifying agreement’. The legislation provides definitions of terms and ensures that those who have settled and paid voluntary restitution to avoid exposure to the loan charge will be given the opportunity to have certain voluntary restitution payments refunded to them so that they benefit from the changes to the loan charge and are not disadvantaged by having settled. The legislation also enables HMRC to set out in the scheme who can apply for a refund, the application process, and the factors that will be taken into account by HMRC in calculating the refund due.

Voluntary restitution will only be refunded where it was paid in respect of a loan made before 9 December 2010 (when the loan charge no longer applies), or a qualifying loan for an unprotected year before 6 April 2016, where use of the loan schemes were reasonably disclosed to HMRC.

The draft scheme has also been published.

Summary of impacts

Exchequer impact (£m)

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025
_	_	_	_	_	_

This measure is expected to decrease receipts. The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at the forthcoming Budget.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

Around 1,000 individuals are expected to either receive a refund of voluntary restitution paid or face reduced instalment arrangements if it was included as part of a time to pay or instalment plan.

Initial analysis suggests that more than 30,000 individuals will benefit from the wider package of changes to the loan charge.

Individuals will need to make a claim for a refund before 1 October 2021 either directly from HMRC or through their employer. HMRC will write to individuals who might be directly due a refund to invite them to make a claim. HMRC will also advertise the refunds scheme and the need to make a claim by the deadline. Individuals should contact HMRC if they believe they are entitled to a refund and have not heard from us by 30 November 2020. We will then send them a claim form and work with them to ensure they receive any amount due as quickly as possible.

Those that make a claim in respect of a voluntary restitution paid, or payable, on a loan made between 9 December 2010 and 5 April 2016, will need to provide information on whether they made a ‘reasonable disclosure’ of their loans.

Customer experience is expected to stay the same because refunding voluntary restitution, or waiving an amount due to be paid, will be a defined, limited, process that does not affect customers’ wider engagement with HMRC.

The government recognises that many individuals may still face tax liabilities related to their use of disguised remuneration schemes following these changes, and that for some, this could involve large sums of money. Separate to this measure, HMRC is implementing a number of changes for individuals who cannot pay the tax due, and who are in need of bespoke arrangements to pay their tax debts.

The measure which repays voluntary restitution amounts is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure will affect those of working age or older who have used disguised remuneration avoidance schemes and paid voluntary restitution on or after 16 March 2016 to settle their tax liability for unprotected years which are no longer in scope of the loan charge. It is not anticipated that this measure will have a significant, or disproportionate, impact on groups with protected characteristics as recognised in the Equality Act 2010. We will, however, provide extra support to anyone who needs help, or anyone in vulnerable circumstances who is finding it difficult dealing with their tax liabilities in relation to the loan charge.

Impact on business including civil society organisations

This will impact around 1,000 employers who are estimated to have paid voluntary restitution on or after 16 March 2016 to settle disguised remuneration liability for unprotected years which are no longer in scope of the loan charge.

Businesses will need to make a claim for a refund before 1 October 2021. HMRC will write to those who might be due a refund to invite them to make a claim. HMRC will also advertise the scheme and the need to make a claim by the deadline. Customers should contact HMRC if they believe they are entitled to a refund and have not heard from us by 30 November 2020. We will then send them a claim form and work with them to ensure they receive any amount due as quickly as possible

One-off costs will include familiarisation with this change and could also include employers obtaining evidence from relevant employees that they have made a ‘reasonable disclosure’ of any loans and providing that evidence to HMRC. There may also be costs for employers who have to pass on refunds to employees who ‘made good’ amounts paid by their employer on their behalf.

There are not expected to be any ongoing costs.

Customer experience is expected to stay the same because refunding voluntary restitution, or waiving an amount due to be paid, will be a defined, limited, process that does not affect customers’ wider engagement with HMRC.

There is not expected to be any impact on civil society organisations.

Operational impact (£m) (HMRC or other)

No IT system changes are required.

The additional costs to process claims for refunds or waivers, calculate and issue payments, and to negotiate amendments to existing settlement agreements are currently being considered.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected groups.

Further advice

If you have any questions about this change, please contact the loan charge review team by email: [email protected]

Declaration

Rt Hon Jesse Norman MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.