What is the loan charge and who has to pay it?

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Up to 50,000 people who are self employed could be faced with a large tax bill, after they were paid through a loan. Find out who’s affected.

What is the loan charge?

The loan charge will apply from April 6th 2019 to people who were paid a loan by an offshore trust, rather than receiving a salary. If you haven’t told HMRC about your loan by 5th April, the loan charge could affect you.

The loan charge is basically the outstanding loan, minus any payments you’ve made. It assumes that you received this amount in the tax year 2018 – 19 – either as income or as profit.

How were people paid through loans?

Thousands of contractors working in the private and public sector were employed through so-called ‘umbrella companies’. Others were advised by their accountants to have their earnings paid as a loan from an offshore trust.

Unlike a salary, people working as contractors didn’t pay tax or national insurance on the loan. Unlike an ordinary loan, they didn’t have to pay it back.

SAVVY TIP: According to the Association of Chartered Certified Accountants, if the loan was paid back in the same tax year, then there’s no tax charge. However, most people didn’t pay back the loans.

In 2017 parliament passed a bill, which meant that the loan charge would apply from this April.

How much will people have to pay?

According to the Association of Chartered Certified Accountants, the average amount that someone who owes money under the loan charge has to pay is £13,000. However, some high earning consultants have been sent bills for hundreds of thousands of pounds.

The Loan Charge Campaign Group has some examples of the amount owed on its website. It says that someone who was paid £30,000 a year for five years could owe over £42,000 in loan charge. Someone who was paid £40,000 over ten years could owe over £182,000.

HM Revenue and Customs has said that people don’t have to pay straight away. If you are earning less than £30,000, you have seven years to pay and if you are earning less than £50,000, you have five years to pay.

Working out what you owe

HM Revenue and Customs says that you may need to check old payslips, bank statements and information from the trust to find out what you owe. It says you may need to check:

  • payslips or invoices you received
  • any contracts of employment or service contracts
  • loan agreements you signed, or any other documents that were part of the payment arrangement, such as letters from your employer
  • bank statements
  • your P60
  • with the people you received the loan from (usually the trustees of a trust), for information about the loans. They have a legal obligation to give you a response within 30 days of you making a written request

Is this charge fair?

Those who’ve been landed with these bills say that there are several reasons why the charge is unfair:

  • They didn’t realise they were unfairly avoiding tax. In some cases they weren’t specifically told how they would be paid.
  • The government can go back to 1999 and insist they pay money owed – a 20-year period.
  • The amounts owed are impossible to pay back or mean that they have to sell their home.

They also say that some HM Revenue and Customs contractors were paid through this scheme and that HMRC has been very slow to act. They also say that HMRC is applying the tax going back for up to 20 years, which is unfair.

However, I know from reading comments online and looking at social media, that some (possibly, many) people are unsympathetic. They believe that those who signed up to these schemes must have known they weren’t paying their fair share of tax.

Where to get help

The Loan Charge Campaign Group says that if you’re unable to cope, you should text ‘LCAG HELP’ to 81025 and a member of the team will call you back.

Useful links

The Loan Charge Campaign Group is crowdfunding for a judicial review. You can find out more on their website.

There’s information on what you need to pay and how to work it out, on the HMRC disguised remuneration loan charge page .

Related articles: 

HMRC to issue refunds of child benefit tax fines

Tax relief on workplace pensions

Tips for filling in your self-assessment tax return – and mistakes to avoid

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