Although around 11,000 taxpayers were taken out of the loan charge by the changes to the law recommended by the Morse report (see our newsletter 9 January 2020), thousands of people are still liable to pay the charge.
Those taxpayers were given until 30 September 2020 to submit their 2018/19 tax return, and to apply to spread the taxation of the disguised remuneration loan over three tax years: 2018/19 to 2020/21.
The spreading election is optional, but in many cases it can reduce the rate and amount of tax due on the outstanding loan, as one third of the loan is treated as income in each tax year instead of the full amount being taxed in 2018/19.
If you have not made this spreading election, but it would be favourable to do so, you can make a late election using the online form, and HMRC will automatically accept it. This policy has been set out in a new Statement of Practice (1/2020).
However, paying the loan charge does not make the problem go away. If there is an open enquiry or assessment for the taxpayer covering a year when they had the loan, those enquiries need to be settled as well. The taxpayer will get a credit for any tax they have paid under the loan charge, but the tax enquiry will look at the tax due in that historical year, not the tax as calculated by spreading the charge.
HMRC will be looking closely at 2018/19 returns, to check compliance with the loan charge where it thinks there has been non-compliance or partial compliance. It may well also open enquiries into tax returns for 2019/20 and 2020/21, if a taxpayer elects to spread the loan charge, and there are risks that suggest the returns are not correct.
The Low Incomes Tax Reform Group (LITRG) have a good summary of what to do about the loan charge.
Written by the Tax Advice Network