Settlement is likely to be a much better option for most people as each DR loan is taxed at the rates applicable to the tax year when the loan was made. However, the loan charge taxes all outstanding loans in 2018/19, which means taxpayers will have only their 2018/19 personal allowance taken into account and are likely to pay more tax at higher or additional rates.
Waiting also means the total loans are treated as income in 2018/19, which could impact a number of income dependent charges or benefits including Tax-Free childcare and the High Income Child Benefit charge. The only way to prevent this is by settling before the 5 April 2019 deadline and people need to act now to be sure they can settle before the loan charge takes effect.
So far, we have received over 20,000 registrations to settle and HMRC’s dedicated teams are helping these people through the settlement process. This involves checking or obtaining the details of loans, checking computations or calculating tax, National Insurance contributions (NICs) and Inheritance Tax liabilities, discussing and agreeing payment terms, and drafting settlement agreements.
The sooner that your clients’ affairs are settled the less interest they will pay and the earlier they can put avoidance behind them. You and your clients can speed up the settlement process by providing accurate loan details and information, including a calculation of the liability where possible. Where we issue the calculations you can help by letting us know as soon as possible if your client agrees them or of any proposed changes, so that we can issue the settlement paperwork and finalise the case.
HMRC understand settling DR tax liabilities may create genuine financial difficulty for some and we will work with you and your clients to support them and find a suitable resolution such as paying by instalments. Payment arrangements for contract settlements can be spread over a number of years where appropriate, or be flexible to allow for future cash flow such as the sale of an asset or an investment return.
We have updated our payment terms for settling for those who have an income under £50,000, so if your client’s current, expected annual income is under this amount and they are no longer engaging in avoidance we will agree instalment plans of up to five years without asking for detailed information. We only require confirmation the payment arrangement is manageable – taking into account living expenses and any liabilities including current year tax and NIC. Those earning more than £50,000 and/or seeking longer than five years to pay should still get in contact with HMRC as we are still willing to discuss payment terms with more detailed information.
If you have clients who are affected by the loan charge but who have not yet registered an interest in settling, it is not too late. They can still register but must provide all the information required to us by 30 September 2018.
HMRC are aware of some promoters offering arrangements which claim to circumvent the loan charge, for example by re-describing DR loans. HMRC doesn’t accept that any of these work and will challenge these arrangements. A loan repayment is disregarded if the scheme user has not suffered the economic consequences of a genuine repayment, so any offer to repay loans through a further set of arrangements will not have the intended result and the user is likely to find they would have been better off settling.
Any arrangements to avoid the loan charge, which seek to deceive HMRC as to what is really happening, may be fraudulent, and advisers should also be mindful of the principles of professional conduct in relation to taxation when advising about any such arrangement.
You can find out more about DR settlement terms here