Loan charge draft legislation and guidance
Updated: Sep 23, 2020
The draft legislation and some associated guidance following the Morse report were published as part of the budget package.
The guidance and legislation which has been published is (unsurprisingly for those who have been following this closely) complicated. At a high level, loans from EBT's and similar structures will not now be subject to the loan charge if they were made before 9 December 2010, and where loans were made after that date, there will be no loan charge where there was reasonable disclosure of the loan and where steps had not been taken to recover the liability associated with the loan.
What this doesn’t mean is that the issues will go away altogether. The disguised remuneration charges which apply to loan write offs, distributions or other relevant steps all still appear to apply and HMRC will continue to pursue tax and NIC for periods where they have already taken formal action by way of assessments or determinations. I expect there will be plenty of discussion on this before the final legislation is published and the position may change, but on the plain words of the legislation and guidance, this seems to be the outcome. Many will feel this is inconsistent with the Morse report.
Where clients have settled with HMRC, there is to be a process enabling them to claim repayment if the settlement agreement involved an element of voluntary restitution and there were loans which fell within the two categories above which are not caught by the loan charge. The draft scheme for repayments indicates that repayment will be made without impacting the relief which was given against subsequent relevant steps. This is a critical point without which the repayment scheme would have been pretty much meaningless.
There are some complications where clients had undertaken loan cleansing and where there has been investment growth in the trust. It also appears (subject to clarification) that HMRC will continue to pursue inheritance tax charges in accordance with their guidance, and they are also saying that any Corporation Tax or Income Tax relief given in the settlement agreement will be clawed back.
The repayment process will ultimately be a matter for HMRC discretion and it does not presently appear that there is any meaningful appeal against a refusal to repay, although it may be possible to seek judicial review of such refusal.
From a practical perspective, it appears that most clients who have settled on the basis that some or all of the liability is voluntary ought to be eligible for a repayment. In one sense, those clients appear to be in a better position than those who have not settled, because it seems they have been able to close down their trust with no further tax charges applying. Clients who have yet to settle will need to consider whether they are willing to bear the ongoing Inheritance Tax and Income Tax risk if they do not now wish to resolve their position with HMRC.
I don’t anticipate that HMRC will simply process requests for repayment or waiver without testing them (interestingly, the scheme for repayments emphasises HMRC’s ability to obtain any information they require to process the application), and it’s clear from their announcements that they intend to devote resource to this process. As a result, I expect it will be necessary to look at each client situation in a fair bit of detail before making an application for repayment, and that agreeing settlements going forward will be more complex than previously.
The areas of tension are likely to be around the extent to which efforts to collect tax were valid, for example whether PAYE determinations reflected the appropriate tax code or were sufficiently accurately quantified. Additionally, I am seeing HMRC put much more effort into addressing the Inheritance Tax risks, and I expect this to continue. I’m also conscious that they have not really been clear on the extent to which IHT charges will fall within the Requirement to Correct regime, so that aspect of any settlement will need to be addressed with care.