HMRC have introduced a new Loan Charge Settlement Scheme following the Government’s response to the Independent Loan Charge Review. The scheme offers more favourable settlement terms to certain individuals and employers with outstanding disguised remuneration liabilities.

For eligible taxpayers, the new scheme could significantly reduce the amount payable. In some cases, the settlement terms could reduce the liability by up to £70,000 compared with the amount that would otherwise have been payable under the original Loan Charge rules.

However, accepting HMRC’s offer is a significant decision. Before agreeing to settle, taxpayers should check the information and calculations used by HMRC and consider whether the settlement terms are appropriate for their circumstances.

What is the Loan Charge?

The Loan Charge applies to certain disguised remuneration arrangements under which individuals received payments in the form of loans or other amounts rather than conventional employment income.

These arrangements were often marketed on the basis that the amounts received would not be subject to Income Tax or National Insurance. HMRC’s position has been that such arrangements were used to avoid or defer tax that would otherwise have been payable on employment income.

The Loan Charge was introduced to bring certain outstanding disguised remuneration loans within the charge to tax. The legislation and its application have been the subject of significant legal and political debate, and some taxpayers continue to have outstanding liabilities arising from these arrangements.

What is the new Loan Charge Settlement Scheme?

The new settlement scheme provides eligible individuals and employers with an opportunity to settle outstanding Loan Charge liabilities on revised terms.

HMRC will write to taxpayers it believes are eligible, setting out the loan and other income information it has used to calculate the proposed settlement amount.

The new settlement terms can include:

• a simplified calculation of the Income Tax and National Insurance that would have arisen in the years the disguised remuneration was received;
• a reduction for promoter fees;
• a further £5,000 deduction from the liability;
• removal of late payment interest from the settlement calculation;
• removal of certain Inheritance Tax liabilities and most penalties; and
• an overall reduction of up to £70,000, subject to the terms of the scheme.

The precise reduction will depend on the taxpayer’s individual circumstances and the information used to calculate the settlement.

Who is eligible?

The scheme is available to individuals and employers with certain unpaid Loan Charge liabilities.

This can include Income Tax, National Insurance and late payment interest arising:

• under the Loan Charge, normally in respect of the tax year ending 5 April 2019;
• in earlier tax years when the disguised remuneration loans were received; or
• where a Loan Charge liability was included in a settlement agreed after 1 June 2021.

HMRC has stated that it will contact taxpayers it believes are eligible.

There are also specific rules where an employer was responsible for deducting PAYE on the relevant disguised remuneration income. In these circumstances, HMRC may seek to settle the liability with the employer before requiring the employee to settle.

Should you accept HMRC’s settlement offer?

A settlement offer from HMRC should not simply be accepted without first checking the underlying figures. The information held by HMRC may not always reflect the taxpayer’s complete circumstances, particularly where arrangements date back many years.

This may be particularly relevant where there are:

• multiple employment or loan arrangements;
• complicated employment histories;
• previous settlements with HMRC;
• outstanding disguised remuneration liabilities outside the Loan Charge; or
• trust arrangements that may give rise to Inheritance Tax liabilities.

Before accepting an offer, taxpayers should consider:

• whether the loan and income figures used by HMRC are correct;
• whether all relevant reductions have been applied;
• whether the proposed liability has been calculated correctly;
• whether other disguised remuneration liabilities need to be considered; and
• whether settlement under the new scheme is preferable to allowing HMRC to resolve the liabilities through its normal processes.

Importantly, accepting the settlement offer creates a legally binding contract with HMRC. It will also bring the relevant compliance checks to an end.

This means that taxpayers should understand exactly what they are agreeing to before signing and returning the acceptance form.

What happens if you cannot afford the settlement?

The new scheme may provide a more manageable route for taxpayers who cannot afford to pay the settlement amount in full.

HMRC has confirmed that taxpayers can agree payment by instalments for up to five years under the new terms. Depending on individual circumstances, longer payment periods may also be available.

Interest will generally apply where payment is made by instalments, and HMRC will issue a revised settlement offer reflecting the agreed payment arrangement.

Taxpayers who are concerned about affordability should therefore contact HMRC before accepting the settlement offer rather than simply allowing the liability to remain unpaid.

What about Inheritance Tax?

Some disguised remuneration arrangements involved trusts, which can give rise to separate Inheritance Tax liabilities.

Under the new settlement scheme, certain unpaid Inheritance Tax liabilities relating to arrangements being settled under the scheme may no longer be payable. This can include liabilities that have already arisen and certain liabilities arising within three months of the settlement offer.

However, taxpayers with trust-based arrangements should consider whether future Inheritance Tax liabilities could arise. In some circumstances, action may be required in relation to the underlying loan or trust arrangement to prevent further liabilities arising.

This is an area where independent professional advice may be particularly important.

What if you have not received an offer from HMRC?

HMRC has confirmed that taxpayers can contact it before receiving a settlement offer.

This may be relevant if you believe you have an outstanding Loan Charge liability but have not yet received correspondence from HMRC, or if you are unsure whether you qualify for the new settlement terms.

It may also be appropriate to seek professional advice before contacting HMRC, particularly where there are historic settlements, multiple arrangements or other unresolved disguised remuneration liabilities.

What happens if you do not accept the offer?

Taxpayers are not required to accept the new settlement offer.

However, if the offer is not accepted, the taxpayer will generally remain liable for the outstanding Loan Charge liability and HMRC will continue to address the matter under its normal processes.

The amount ultimately payable may therefore be higher than the amount offered under the new settlement scheme, particularly where late payment interest continues to accrue.

This makes it important to compare the settlement offer with the taxpayer’s alternative options before making a decision.

How we can help

If you have received a Loan Charge settlement offer from HMRC, we can help you understand the calculation and assess whether the proposed settlement is appropriate for your circumstances.

Our team can assist with:

• reviewing HMRC’s settlement calculation and supporting information;
• checking the loan and income figures used by HMRC;
• assessing the reductions available under the new settlement terms;
• considering other outstanding disguised remuneration liabilities;
• reviewing potential Inheritance Tax implications; and
• assisting with discussions with HMRC, including payment arrangements where appropriate.

The new Loan Charge Settlement Scheme may provide a significant opportunity for eligible taxpayers to resolve long-running liabilities on more favourable terms. However, accepting a settlement is legally binding, so it is important to understand the figures and implications before signing the agreement.

If you have received an HMRC Loan Charge settlement offer, or you have an outstanding disguised remuneration liability and are unsure what to do next, contact our Tax team to discuss your options before responding to HMRC.