What is the Loan Charge?
The Loan Charge is a UK Government tax policy that was introduced in 2016. It gave over 50,000 people across the UK until the 5th April 2019 to settle their tax bills or face a new Loan Charge.
For those who were not able to settle their tax bills before the 5th April, they will now have begun receiving tax demands, often for tens of thousands of pounds.
The Charge has proved controversial as some of these bills will relate to tax due on income that was received decades ago.
What is the Loan Charge and why was it introduced?
The Loan Charge was introduce by the UK Government in an attempt to stamp out what they believe was a tax avoidance scheme. It was aimed at UK workers, often freelancers and business consultants, who were paid by employers through staff loans instead of wages. The idea being, where you receive income through a loan you do have to pay tax, unlike when you are paid wages or contractor fees.
However, HMRC claim these loans were not really loans and instead were designed to disguise income that would have been taxable, as income that was not taxable.
They also claim, unlike normal loans, these loans were never expected to be repaid, meaning the people that received them, effectively received tax free income.
Why is the Loan Charge so Controversial?
The reason the Loan Charge has become so controversial is because it affects a wide range of people from all walks of life, and many of them never chose to be paid like this, but it was forced on them. Also many were advised by professional advisers who told them that such payments were both legal and approved by HMRC.
However, HMRC have said they always took the view these Schemes were tax avoidance devices and tried to dress up remunerations as loans, resulting in the UK Treasury losing £3.2 billion of tax revenue.
Those that are opposed to the Loan Charge, however, have argued that it amounts to a retrospective tax and is grossly unfair.
How does the Loan Charge work?
Another reason groups like the Loan Charge Action Group (LCG) believe the Charge is unfair is because it adds up all the Loans that were taken out by individuals and assesses their tax liability in one financial year, meaning higher levels of tax are due than would have been had the Loans been taxed in each individual year.
For example, those that have a Loan Charge applied for all their loans on the 5th April 2019 will only be entitled to the personal allowance for that year. This will mean, for those that were paid by loans over a number of years, they won’t receive the personal allowance for each of those years and instead will be liable for substantially more tax than they otherwise would have.
They may also be moved into a higher earner tax bracket and will face penalties where they cannot pay their tax bill.
What Effect will the Loan Charge have on people?
The Loan Charge Action Group believes the Charge will have a devastating effect on people. HMRC estimate the average amount avoided was £20,000 per year, which will mean where people were paid over several years their final tax bills will be significantly higher than they would have had each year been paid over their respective tax year year.
The Loan Charge Action Group estimate, for example, where someone earned £30,000 per year over 5 years, the Income Tax bill could be as high as £42,324, rising to £84,199 where they had been in a loan scheme for 10 years.
For those on higher incomes, the figures are more eye-watering, with those earning over £50,000 and in a scheme for 5 years possibly owing as much as £140,899, rising to £277,199 where they had been in a scheme for 10 years.
What can those affected do?
Apart from exploring whether a claim for mis-selling is possible against those who advised them (which won’t affect their liability to HMRC) those affected will have to pay the bill.
HMRC has said they will only use Bankruptcy as a tool of last resort, but are determined to recover the sums owed for the benefit of the public purse. They have said they will try an enter repayment plans with people where they approach them and can show hardship.
What HMRC has also said, however, is people should not try and avoid paying the bills and should avoid entering any scheme that offers to help them avoid their liability for the Charge. They have said a number of such Schemes are available, but won’t work and are illegal.
To show how serious they are about this, earlier this month they arrested six people, five men and one women, who were operating such Schemes, offering to show people how to avoid their liability for the Loan Charge.
If you have had a Loan Charge bill sent to you and believe you will struggle to pay it, contact a Creditfix Adviser for free advice on 0800 0431 431