The Low Incomes Tax Reform Group (LITRG) has welcomed HMRC’s decision to allow late loan charge spreading elections, but has warned of other barriers stopping people from meeting their loan charge obligations. HMRC must address these barriers to break the impasse, says LITRG.
HMRC have recently published a Statement of Practice1 that sets out how they will use discretionary powers to accept late elections by taxpayers to spread their outstanding loan charge balance over three tax years.2
The original deadline for making a spreading election was 30 September 2020. But the deadline, which was also the revised loan charge tax return filing and payment deadline (extended from 31 January 2020), seems to have been missed by a number of people. To ensure that taxpayers who wish to make an election can do so, HMRC say any late election made up to 31 December 2020 will be automatically accepted by them. And any elections made on or after 1 January 2021 will not be accepted, except in limited circumstances where there are exceptional reasons for failing to make an election within the required time.
Victoria Todd, Head of LITRG, said:
“We welcome HMRC’s introduction of this easement. The alternative would have seen some people lose out on making an election that could have benefited them.3 But we are not convinced that this act alone will be enough to get people moving towards complying with the loan charge.
“The reasons for people missing the 30 September deadline are varied and complex. It is commonly accepted that some taxpayers were put into loan arrangements that were operated behind the scenes to save the engager money,4 without the taxpayer’s full knowledge or understanding. It is not surprising that HMRC’s attempts to contact these people to tell them about the loan charge and what they need to do under it, including making a spreading election if appropriate, may have failed to elicit a response. It is hard to see how this latest announcement will change this.
“While we welcome this announcement by HMRC, it does not address the fact that there are still some people out there who need to deal with the loan charge but who do not have enough insight or information to be able to fulfil their obligations.
“We urge HMRC to write to people who missed the 30 September deadline, setting out the specific information that HMRC hold about the ‘umbrella’ companies that they were in where loan arrangements are suspected. This could help act as a trigger or prompt for taxpayers to investigate and take the first step to bringing their tax affairs up to date.
“Unrepresented taxpayers are sometimes worried about engaging with HMRC. These letters should also highlight the available help, for example via TaxAid or HMRC’s extra support team.”
Unexpected Self Assessment tax hit
Unfortunately, for taxpayers who still need to submit their 2018/19 tax return and arrange payment of the loan charge, there may be financial consequences for missing the deadline – in addition to any amount of loan charge owed.
Victoria Todd said:
“For many who missed the extended 30 September 2020 filing and payment deadline, late filing and payment penalties will be charged as if the 31 January 2020 original deadline was not met (that is, from 1 February 2020), meaning their tax return and payment are already over nine months late.”
For example, someone who needs to include £1,000 of loan income in their 2018/19 tax return will have a tax liability of £200 (assuming they are a basic rate taxpayer). Yet their total interest and penalties are around £425 – more than double the amount they need to pay by way of the loan charge.5
Victoria Todd said:
“We know that HMRC want to conclude remaining 2018/19 loan charge cases as soon as possible. The fact that late filing and payment interest and penalties could have a totally disproportionate impact in some cases may be stopping people taking the final steps required, regardless of the new spreading election easement. A way to address this would be for HMRC to automatically accept a reasonable excuse defence to the late filing and payment penalties for tax returns submitted by 31 December 2020, to help encourage people to meet their loan charge obligations.”
Notes for editors
1. Statement of Practice re. late elections to spread the LC: www.gov.uk/government/publications/statement-of-practice--2020
2. In his report on the loan charge, Sir Amyas Morse recommended that: “Taxpayers should be entitled to opt to spread their outstanding loan balances over three years, to mitigate the impact of taxpayers paying tax at a higher rate than they ordinarily would. This reduces the effect of stacking their outstanding loan balances into a single year, which artificially created an increased exposure to a higher rate of income tax.”
3. This may not be beneficial in all cases and taxpayers should ensure they understand the consequences of making this irrevocable election
4. For example, paying someone in a ‘non-taxable’ element like a loan, saves the engager employer NIC at 13.8 per cent.
5. For further information on how people can make a late spreading election, see our recent news piece: www.litrg.org.uk/latest-news/news/201112-your-options-if-you-missed-30-september-loan-charge-deadline#toc-late-spreading-election-and-loan-information-form
6. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact Hamant Verma, External Relations Officer, 0207 340 2702 HVerma [at] ciot.org.uk.
Out of hours contact: George Crozier, 07740 477 374.