Loan Charge – what is a loan?

HMRC continue to pursue taxpayers who have received loans back from either in lieu of earnings of typically a contractor or back from an Employee Benefit Trust (EBT).  The Loan Charge was effective from 30 September 2020 by which time HMRC were to be notified of all such loans and tax paid on them under the Disguised Remuneration rules.  But for some, the issue has become what is a loan?

Back to basics

Generally speaking, money can be received by way of a gift, remuneration or a loan.  Gifts can be taxable under Inheritance Tax rules.  Remuneration is taxable under Income Tax and NIC rules.  Loans are not taxable.  This is why most of the tax avoidance schemes were focussed on making loans – because they are not taxable.

Documentation purporting to be a loan may or may not exist.  However, HMRC will expect there to be a number of basic elements in existence in order for it to be a loan.  Most loans will contain some, if not all, of the following features:

  • The loan is widely available;
  • There is a repayment date;
  • Interest payable;
  • The loan is stated as being either secured or unsecured;
  • There is a clause specifying what will happen in the event of default.
Ambiguities

If the general public can walk into a high street bank and secure an equivalent loan on the same terms, there is perhaps a good argument to say that it is a loan.  Often though there is a smoke screen put up to confuse matters.  The word loan is substituted for advance or credit facility.  It might be that money is taken by the “lender” but it is for administration and not for interest.

The main ambiguities begin to arise where more than one of the elements are not there.  So, it may be that you have to be a member of a particular family, or the loan was never going to be repayable, or the interest was only to be rolled up and never paid.

Disguised remuneration

HMRC has attempted to cut through all of this and treat such transactions as Disguised Remuneration and apply tax and NIC to the loan amount in any Settlement or under the Loan Charge.

All well and good you might think, problem solved.  But what if now the “lender” wants the money back?

If tax and NIC has been paid and now the loan has to be repaid, the “borrower” will be out of pocket.

In summary

Before any Settlement is reached with HMRC, it might be advisable for the “borrower” to go back to the “lender” to confirm the position on the loan itself.  Has the loan been forgiven / waived / written off ?

Reaching a Settlement with HMRC is clearly the goal to have.  Having confirmation that the loan is no longer repayable is also important.  If you need any help on the tax side, please contact me.

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