Loan charge introduced to tackle disguised remuneration

Employees in receipt of payments in the form of loans will face a loan charge from HMRC in order to prevent tax avoidance through disguised remuneration

Draft legislation from HMRC shows the measure will apply to existing disguised remuneration schemes that were made after 5 April 1999 and will have effect from 5 April 2019. It will have effect once Royal Assent is given to the Finance Bill (no 2).

The charge will apply to outstanding loan balances on 5 April 2019. Scheme users can repay loans up to the end of 5 April 2019 in order to prevent the loan charge arising. The loan charge will tax the outstanding loan balance as employment income in the 2018/19 tax year.

The tax will be calculated using the applicable allowances, rates and bands in 2018/19. The loan charge does not amend, or take into consideration, earlier tax years, or returns, so no adjustments for interest are made.

It also introduces a requirement for employees in scope of the loan charge to provide additional information to HMRC about the loans they have received. Broadly, the information required is contact details, case identification and the loan, or quasi-loan, outstanding balance calculation.

Double taxation provisions are included, while HMRC is developing a digital tool for employees to provide their information. Another option for those unable to use the digital tool will also be provided. More information on this will be provided at a later date.

To ensure compliance, the draft legislation includes penalties. Under the regime, a failure to complete the reporting requirement fully, or by the deadline, could lead to a fixed fine of £300. A continued failure to comply may result in daily penalties of up to £60 a day for a maximum of 90 days.

A penalty of up to £3,000 may be due if an individual includes an inaccuracy in their reporting requirement return. A penalty may also be due if the individual identifies the error but does not inform HMRC.

These penalties can be appealed.

HMRC intends to contact all individuals it is aware of to inform them of their duty to provide information, and the consequences for failing to do so.

Guidance will be published setting out how HMRC intends to apply these penalties at a later date.

The draft legislation can be viewed here.

Report by Calum Fuller

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