Loan charge guidance – the fog clears (a bit)

HMRC have now published guidance on the implications of the Finance Act 2020 changes for ongoing disputes and settlement discussions. As ever, there are a few steps forward and a few steps back. There’s also lots to do before the (now absolutely fixed) 30 September deadline.

Some key takeaways in the guidance

– The 2017 settlement terms will not be available after 30 September. The guidance clears up any ambiguity in this respect, – For clients who are not subject to the loan charge, there will be new settlement terms available – the ‘August 2020’ settlement terms. There appears to be some further downside deliberately built into these terms as against the November 2017 terms. In particular; – The availability of corporation tax relief will be restricted in line with the strict statutory position, – It appears to be HMRC’s view that the payment of voluntary restitution will give rise to s223 ITEPA 2003 charges in appropriate circumstances, – It appears that tax charges will not be applied to accrued unpaid interest where settlement is agreed under the August 2020 terms, which must be the right analysis if the amounts contributed to trusts are treated as diverted or disguised earnings. This approach also seems to be consistent with the views of the First Tier Tribunal in Root 2 Tax Ltd v HMRC. However, there is obviously no guarantee that HMRC wouldn’t seek to charge tax on accrued unpaid interest if settlement is not agreed. – Although it’s not explicit in the guidance, it’s reasonable to assume that the August 2020 terms will be available after 30 September. – It seems absolutely clear that future disguised remuneration charges will apply where settlement is not agreed notwithstanding that the loan charge itself will not apply. Where clients don’t settle under the November 2017 terms and are subject to the loan charge, this will need to be dealt with by 30 September. It can be assumed that HMRC will look to charge penalties for failures to report the loan charge in appropriate circumstances.

A couple of obvious points

– What about clients who believe they do not fall within the loan charge (for example because they have made ‘reasonable disclosure’)? These provisions are not straightforward and are likely to be the subject of disputes between taxpayers and HMRC. It’s not clear what the position will be for those clients after 30 September 2020. HMRC appear to acknowledge this by indicating that further guidance is promised ‘in autumn 2020’ but it would certainly have been helpful if that guidance was published at the same time as the other material and in any event before 30 September. It’s not clear to me why this further guidance can’t be published now. – Clients who made voluntary settlements with HMRC before the Morse report recommendations were implemented are now in a significantly better situation than clients who didn’t. Many clients paused their settlement discussions, with the agreement of HMRC, to await the outcome of the Morse report and the implementing legislation. This is, on any analysis, a perverse outcome and doesn’t sit well with the spirit of the Morse recommendations. Here’s hoping for more clarity soonest! In the meantime, I’d recommend looking really closely at the downsides of not taking action by 30 September whether or not the loan charge is likely to apply.