Loan charge is essential legislation in the UK for contractors and employees who were involved in disguised remuneration schemes. Loan charge that came into effect on the 5th April 2019, works in a way that it adds up all the outstanding loans together and taxes them as income for the tax year 2018-19. As a result, there are higher chances that you might end up paying more on taxes at higher rates than what you would have paid when you took the loan. However, if you manage to settle your tax affairs under the settlement terms published by HMRC in November-2017, you can save up and pay the tax at the rates that were applicable when you got the loan amount.

Loan charge was announced in the budget of the year 2016 and was passed into law in 2017. The main aim behind this law was to ensure that individuals who availed tax avoidance schemes from April-1999 and received loans as remuneration pay their due share of taxes. However, there are petitions from more than 150 MPs to revise this legislation. Moreover, there are also campaigns against Loan Charge by Loan Charge Action Groups (LCAG) and APPG.

Nevertheless, as a contractor, it is vital to know all about a Loan Charge if you were involved in a disguised remuneration scheme in the last 20 years. One of the most important things that you need to know is that the current law on loan charge has been applicable from April 5, 2019.

So, what are the options that you have? Essentially, there are two options:

1. You can voluntarily go and settle the loan charge in the same year when you received the loan amount. This way, you will pay the taxes at the same rates, and there will be no burden of paying extra or getting stressed in case the tax increases.

2. Be ready to pay the loan charge. In any case, this is going to be a more expensive option, and settling would work in your favor, at least in terms of the total amount that will go in taxes.

These are the two most plausible options. However, if you want to expand your horizon, you can check out two more options in this regard.

1. Repay the loans that you have taken. If you end up paying all your loans and there are no liabilities, then HMRC will not ask you for any taxes, neither will there be any extra charges for the National Insurance. However, when you do it, you must ensure that this loan payment does not lead to any other form of tax avoidance. Moreover, the taxpayer might have to show evidence that the amount for the repayment was taxed already or comes from another commercial loan. That way, you can save yourself from the loan charge.

2. You can dispute the right of HMRC to make you pay the Loan Charge. As mentioned above, this law has faced severe criticism from several politicians and experts. Therefore, the legitimacy of HMRC to collect Loan Charge is already being challenged on several fronts. Hence, it is good news for contractors who are taxpayers here. Therefore, there are possibilities of changes implemented on these new charges. However, this can be a risky option because there is a great likelihood that HMRC will stick to the rules of the Loan Charge and will end up implementing it for everyone.

So, What Should Be Your Next Steps?

It is crucial that you assess the pros and cons of the steps that you intend to take. It is essential to understand that the inclination of HMRC would mostly be towards the first two options of either repaying the full loan or paying the Loan Charge. In this case, it is seen that HMRC is urging people to choose the first option and settle their loans ultimately. However, it is also essential to acknowledge that for some people, paying the Loan Charge could be in their advantage.

Also, there can be a possibility that the contractors end up settling the loans but later find out that they would have benefited more by merely paying the Loan Charge. Hence, there are a lot of uncertainties around the options that come along with the Loan Charge law. You must note that paying the Loan Charge can be more attractive for you if your income for last year was below the basic taxation rate, especially if you can show some relief in the form of pension contributions.

Moreover, in case of loan repayment, the amount will be much higher than what you will have to pay as the Loan Charge. Therefore, you need to weigh your pros and cons efficiently before deciding the Loan Charge. So, if you are still confused about your next steps, you can get in touch with Target Accounting to get our expert advice on this matter. We will make sure that you find the right solution to this problem.