Brian Burke, Director at Business Advisory firm Quantuma, provides insight into the actions taken by the government to deter tax avoidance schemes and discusses the options relating to tackling the HM Treasury review of loan charges.
The government has taken successive actions to deter the marketing and use of tax avoidance schemes, resulting in an increase in the powers available to HMRC to tackle them. Alongside effectively changing behaviours, these measures have proven successful in collecting revenues.
The most recent increase in powers has been met with notable resistance, scrutiny and criticism. The concerns raised and recommendations of the House of Lords Economic Affairs Committee and the Loan Charge All Party Parliamentary Groups (APPG) will mean that their application will remain under the spotlight. But, based on the direction of travel, the outcome that there will be no change to the legislation that allows HMRC up to 12 years to recover tax relating to offshore matters, and no delay to the implementation of the loan charge, is unsurprising.
The new time limit to raise assessments for up to 12 years to recover income tax, capital gains tax and inheritance tax from offshore matters or transfers, provides an opportunity to place offshore planning under further scrutiny. In some instances, it will offer another bite of the cherry having been described by Lord Forsyth of Drumlean as ‘another disproportionate power’. This, along with the loan charge, was arguably unnecessary, as HMRC already had sufficient powers given the existing time limits to challenge and recover tax. However, it is apparent that neither the government nor HMRC share this view.
The introduction of the loan charge has wide and significant implications. Applied to disguised remuneration, loan balances outstanding at 5 April 2019 will result in them being taxed as income for loans dating back as far as 1999.
Retrospective or not, those subject to the loan charge can repay the loans in full, agree settlement with HMRC, or pay the loan charge as part of their 2018/19 tax liability. It will not always be that simple – for example, in a settlement you are expected to pay the tax due even for years where there is no formal enquiry open. HMRC requests voluntary restitution for these years, but late payment interest does not apply. If voluntary restitution is not paid, then these years will become subject to the loan charge.
Now these changes have taken effect, the practical approach, if not done so already, is to seek to find a way to deal with the liabilities and to find an appropriate resolution.
HMRC’s approach is to make it as easy as possible to settle liabilities. In fact, we have already encountered flexibility from HMRC when exploring payment options across a number of years. There is no upper time limit on a time to pay arrangement, and the simplification of approach to those earning £30,000 and £50,000 per annum is helpful. In addition, similar flexibility is expected to apply to repayment of the loan charge once it becomes due.
That being said, there is a cost applied to any time to pay arrangement. Forward interest will be applied and in some cases, this can add a notable additional sum to the significant tax burden which is charged at one per cent above the statutory rate, so is currently 4.25 per cent per annum, and is applied to the balance.
The availability of flexible time to pay should not be seen as a suitable catch-all solution. Those facing significant liabilities and not in a position to settle should not simply agree with what is on offer, or enter into an agreement where there is a high likelihood of default. Each case must be considered on its own merits. HMRC has made it clear that where someone is able to pay the liability, they are expected to do so however, they are also willing to consider means restricted settlements. At this stage, many are yet to reveal the true extent of their vulnerability to the charge – we would expect that HMRC will seek to treat these taxpayers fairly.
Flexibility will be required; HMRC has already stated that they will not force anyone to sell their main home to pay their debts, and that they also don’t want to make anyone bankrupt insolvency is the last resort.
We would recommend that anyone faced with these issues should seek suitable help and advice at the earliest opportunity. Advice will allow them to understand the options available, ensure any implications be properly considered, and to help to find the best way forward in order to achieve a sensible outcome.
Brian Burke, Director
Notes to Editors
Quantuma is a leading business advisory firm which works with businesses at the key milestones, delivering partner led solutions to help clients take advantage of opportunities and overcome a range of operational and financial challenges, enabling them to achieve their business objectives and ambitions. Offices in London, Southampton, Marlow, Watford, Brighton, Birmingham, Bristol, Manchester, Ringwood and Weymouth. In July 2018, the firm opened two international offices in Cyprus (Nicosia and Paphos).