Policy paper

HMRC issue briefing: settling disguised remuneration scheme use and/or paying the loan charge

Updated 30 October 2024

The government announced at Autumn Budget 2024 that there will be a further independent review of the loan charge, to help bring the matter to a close for those affected whilst ensuring fairness for all taxpayers. HMRC will consider what updates need to be made to relevant guidance once the government announces further details about the review and once the review has concluded.

The loan charge legislation remains in force. If you have agreed a payment plan with HMRC you should continue to pay the amounts you have agreed to pay while the review is ongoing.

Introduction

This briefing explains how HM Revenue and Customs (HMRC) will help customers settle their Disguised Remuneration (DR) liabilities.

What is DR?

DR avoidance schemes are tax avoidance arrangements that seek to avoid Income Tax and National Insurance Contributions (NICs), by paying people who use the schemes their income in the form of loans or other payments, which are unlikely to ever be repaid. The loans are no different to normal income and are taxable.

In one example, a person who used a DR avoidance scheme who earned £77,000 over 2 years had a declared income of just £26,000 per annum – and tried to pay £11,000 less tax than someone in the same job who was not involved in an avoidance scheme.

HMRC has always been of the view that these schemes do not achieve the tax advantages they say they do, a view confirmed by the Supreme Court in 2017. Individuals are personally responsible for paying the right tax under UK law and people who use DR schemes are required to declare all of their taxable earnings – including earnings disguised as loans under the schemes – on their tax return.

As with other forms of tax avoidance, DR involves bending the rules of the tax system to try to gain a tax advantage that was never intended, using contrived, artificial transactions that serve no purpose other than to try to reduce the tax payable.

The government is clear that it is unacceptable for businesses or individuals to use these schemes, and that their use is unfair to the vast majority of taxpayers who have never used them and pay the tax that is owed.

What is the loan charge?

In 2017 Parliament passed legislation that required people using DR schemes to declare their outstanding loan balance, as at 5 April 2019, as income on their 2018 to 2019 tax returns and pay tax on it. This is known as the ‘loan charge’.

If a customer used a scheme designed to avoid tax on profits from a trade, the loan charge may apply to outstanding DR loans made between and including 9 December 2010 and 5 April 2017. If a customer used an employment-based scheme, the loan charge may apply to outstanding loans made between and including 9 December 2010 and 5 April 2019. Any DR loans received after these dates are still chargeable to Income Tax and NICs for the relevant year.

The loan charge affects individuals if they used DR tax avoidance and they did not either:

• repay their loans before 5 April 2019
• settle their case with HMRC under the November 2017 disguised remuneration settlement terms or relevant earlier settlement opportunities

The loan charge also affects UK employers still in existence on 5 April 2019 who provided loans through DR tax avoidance if, on or before 5 April 2019, their employee or former employee did not repay their loans. This is unless the employer or employee has already settled their case with HMRC under the November 2017 disguised remuneration settlement terms or relevant earlier settlement opportunities. These employers were required to operate Pay As You Earn (PAYE) on the amount of outstanding loans.

Changes following the Independent Loan Charge Review

Sir Amyas Morse published his independent review of the loan charge policy and its implementation in December 2019. The government accepted 19 out of the review’s 20 recommendations. These included removing loans made before 9 December 2010 from the charge. The amendments went before Parliament in July 2020 and became law following Royal Assent.

Following the review all customers affected by the loan charge had to file a complete and accurate 2018 to 2019 tax return, including full details of loans subject to the amended loan charge, and pay the tax due or enter into a Time to Pay arrangement by 30 September 2020. Those who did so benefitted from interest and penalty waivers.

HMRC is committed to ensuring that anyone with concerns around the affordability of the loan charge has access to as many payment support options as possible.

Settling scheme use

There are principles that we will follow when settling a customer’s DR scheme use:

• as set out in our Litigation and Settlement Strategy we will only settle for an amount that is consistent with the law. This means we will not agree to apply a different rate of tax to that provided in legislation. We also have to be fair to all taxpayers, including those who have already settled their use of DR and those who have never used a tax avoidance scheme

• customers who worked with us to conclude settlement by 30 September 2020 were able to settle under terms published in 2017 enabling them to keep clear of the loan charge. These terms have now been withdrawn and customers who didn’t settle under the 2017 settlement terms should have reported and paid the loan charge (or agreed a Time to Pay arrangement)

• we recognised that there were a small number of customers who, for exceptional reasons beyond their control, were not able to finalise their settlement with us by 30 September 2020. We have engaged with these customers to settle as soon as possible. This is not a change in our policy. This approach is only ever taken in response to the specific facts and circumstances of individual customers, for example if a customer was in hospital close to the deadline and for a prolonged period since then

• if DR customers wish to settle, whether or not the loan charge applies, they can do so under the DR settlement terms 2020. This includes customers who received loans before 9 December 2010, where HMRC still has open enquiries or assessments

• for customers who pay the loan charge, the published settlement terms include information for settling any remaining liabilities that arise from open years or assessments of DR scheme use

Customers who do not wish to settle the tax due in respect of their DR scheme use under our published terms have the option of taking their case before the tribunals and courts.

As the litigation process could take several years, customers who adopt this course of action could risk paying additional legal costs and interest.

We will continue to progress and settle open enquiries into DR under our existing powers, including schemes that are now out of scope of the loan charge. This approach was endorsed by the independent review.

Double taxation

All customers liable for the loan charge, also remain liable for any tax relating to earlier years where loans were taken out and HMRC has open enquiries or assessments. There are rules to make sure there is no double taxation on the same income.

Please see the section below on residual tax, which explains that in certain circumstances HMRC will not collect any additional Income Tax, NICs, or late payment interest relating to earlier years, from customers who pay the loan charge.

Residual Tax

For open enquiries and assessments relating to loans subject to the loan charge, HMRC will take into account how much loan charge has been paid. Where there is an amount remaining to settle these enquiries and assessments, HMRC refers to this amount as ‘residual tax’. Residual tax is made up of Income Tax, NICs and late payment interest.

We will not collect an individual’s residual tax where all the following criteria are met:

• the loan charge has been paid

• the average annual income provided to the individual through a disguised remuneration scheme is £75,000 or less in each tax year

• no litigation has been started before a court or tribunal in relation to the residual tax or loan charge

Where these conditions are not met, residual tax will need to be paid to settle open enquiries and assessments for the years in which the loans were made.

To calculate whether the £75,000 average applies, we add together the total amount of loans received and divide by the number of tax years in which they were received. For example, if loans of £10,000 were received in the year ended 5 April 2014, £40,000 in the year ended 5 April 2015 and £100,000 in the year ended 5 April 2016, the result would be total loans of £150,000 divided by 3. This gives an average loan amount per year of £50,000.

If all the criteria are met, HMRC will not collect the residual tax and will outline this in the relevant settlement documents.

If the criteria are not met and residual tax is due, we will help customers to settle and pay what they owe. Whether settlement is achieved via a formal notice (a notice HMRC issues when our checks are complete and which customers can appeal) or a settlement agreement (a contract which sets out the tax owed) will depend on the specific circumstances for each customer.

Customers do not need to apply for HMRC’s approach to residual tax. HMRC will automatically apply this approach if the conditions are met. If an individual has paid the loan charge and believes this approach applies but it does not appear to have been accounted for, we encourage them to get in touch with us.

Expenses

For the purposes of settling DR scheme use under the 2020 terms, if HMRC needs to work out taxable profits when calculating the tax liability arising from the scheme use, actual expenses incurred are allowable as a deduction. Those expenses must have been incurred wholly and exclusively for the purposes of the trade, or wholly, exclusively and necessarily in the case of employment.

Settlement agreements can therefore take business expenditure into account when customers ask us to look at the expenses incurred. HMRC considers expense claims on a case-by-case basis, and our decision is dependent on the specific details of each claim.

HMRC will undertake assurance to establish the correct level of expenses. This may include asking for information and evidence.

Customers should tell us the actual amount of expenses they believe they incurred. The expenses cannot have been reimbursed and they cannot have been claimed elsewhere for tax relief purposes. If customers do not have records, an estimate can be made, with accompanying explanation as to how the estimate was arrived at. From this, HMRC will consider whether it appears reasonable and whether further assurance will be required.

Expenses cannot be deducted from loan charge liabilities.

Customers who want to settle now

Where a customer has outstanding tax on DR loans, they can settle under the DR 2020 settlement terms.

Our guidance on settling your tax affairs provides more information on how to settle now.

Settling a disguised remuneration scheme use will give those involved certainty about their tax affairs and help them get out of tax avoidance for good. It may also mean they do not face a bigger tax liability if the scheme they used is referred to the tribunal.

Support for customers

We know that some of our customers need extra help to resolve their DR use at what can be a difficult time for them. All our DR and debt management teams are trained to identify customers who might need extra help managing their affairs:

• we will make adjustments to support customers who require help; for example, as a result of short-term illness or language difficulties

• where a customer faces more serious and pressing issues, we will provide a named contact; for example, where someone is very distressed as a result of a recent bereavement

We review our internal guidance regularly, so that our advisers can provide help to customers in debt. HMRC also signposts organisations such as Mind and Samaritans to help support customers who have mental health issues or who are demonstrating emotional distress.

In 2022 we expanded our services to provide further emotional support to customers who may need extra help, through a new project working with Samaritans. When needed, we will signpost customers who may benefit from specialist emotional support to a dedicated Samaritans helpline.

A customer can nominate a professional tax agent, a friend or a family member to deal with their tax affairs on their behalf.

We will work with people who are supporting or acting on a customer’s behalf, including a financial adviser, or organisations such as Citizen’s Advice or TaxAid.

Contacting HMRC to arrange an affordable payment arrangement (Time to Pay arrangements)

Where customers are unable to pay in full on time, we want to work with them – and are always ready to help those who want to pay their tax liabilities. We do not want customers to worry and we’re here to make things as straightforward as possible. Customers should call our loan charge helpline on 0300 322 9494 to discuss payment options.

We will work with customers to agree a Time to Pay instalment arrangement based on what they can afford to pay. We work out what a customer can afford by looking at their income and expenditure and use that to work out how much time they need to pay. Where a customer has already done this through a Standard Financial Statement with a debt advice provider, we can use that to assess how much they can afford to pay when negotiating a Time to Pay arrangement.

We will not ask people to pay more than 50% of their disposable income per month, unless they have a very high level of disposable income.

We consider pension payments as income, including any lump sums on retirement, so we will include these in our assessments of customers’ ability to pay a debt. However, we will not ask customers to release funds from their existing pension pots.

Where a customer has the means to pay their tax debts by realising assets, for example, savings, shares, or equity in a property, we will discuss these options with them. If there are assets that we both agree can be realised, then we expect them to be used to reduce the debt as much as possible before we agree a Time to Pay arrangement.

HMRC will not force anyone to sell their main home or access their pension funds early to pay their loan charge or DR debts.

Anyone with income of less than £50,000 in the most recent complete tax year information is available for can agree a Time to Pay arrangement without needing to give any detailed financial information. We will:

• agree Time to Pay arrangements for up to 5 years for customers who do not have disposable assets and who have income less than £50,000

• agree Time to Pay arrangements for up to 7 years for customers who do not have disposable assets and who have income less than £30,000

Customers entitled to a minimum 5 or 7 year Time to Pay arrangement can choose to pay it sooner. We can also agree a spread of payments for longer than 5 or 7 years if this is needed, based on individual circumstances. There is no maximum time limit for a Time to Pay arrangement. Customers will need to provide details of their income, expenditure and details of any assets they hold so that we can agree a plan that is affordable and sustainable.

Customers who owe £30,000 or less and need less than 12 months to pay what they owe, may be able to set up a Time to Pay arrangement online without speaking to us. Customers needing longer to pay or who are entitled to a 5 or 7 year minimum Time to Pay arrangement, should call the loan charge helpline on 0300 322 9494 to discuss their circumstances and payment options.

Read more about how HMRC supports customers with tax debts.

Repaying a DR loan to a third party

HMRC is aware that some people who have an outstanding DR loan may be contacted by third parties seeking repayment of the loan. HMRC has published information for customers who receive this type of contact, including actions that individuals can take and other organisations they may wish to contact.

Independent debt advice

If customers want debt advice, they should call the loan charge helpline on 0300 322 9494. We will refer them to an independent debt advice organisation that understands how the loan charge affects them and the options they have.

HMRC will help customers make the initial referral and then customers can make further arrangements with the debt advice organisation at their convenience.

The discussions are private and the debt advice organisation is independent of HMRC. They can give more information about the options available to customers with debts. HMRC is not sighted on customer’s discussions with the debt advice provider and has no influence over them.

The advice provided is free, customers will not be charged.

HMRC approach in cases where someone chooses not to engage and pay what they owe

Where customers do not contact us to pay or arrange a payment plan, we will contact them by letter or telephone to discuss payment. Where customers do not respond to our communications, or refuse to pay, HMRC has debt enforcement powers to help us collect outstanding tax.

These powers come with the responsibility to use them carefully and fairly. We take that responsibility very seriously, and we only use our enforcement powers as a last resort. HMRC will not force anyone to sell their main home or access their pension funds early to pay their loan charge or DR debts.

We want to talk to customers about their situation and agree a way forward. Customers should respond to our communications as soon as possible because, unless we can discuss their situation, we cannot tell if they need extra help or are simply refusing to pay.

If we’re unable to make contact, we will make additional enquiries to confirm we have the customer’s correct address and may make a visit to the customer’s address to ask about their financial situation and ability to pay. We’ll try to agree how best to settle the debt, which might be in full or through instalments in a payment plan.

We will only pursue bankruptcy as a last resort, for example, where a customer refuses to pay despite being able to.

Read more about what will happen if you do not pay your tax bill.

What happens now

Whatever a customer’s circumstances, if they have been unable to pay in full and find themselves in debt, we will work with them to find affordable payment solutions.

Most people who have used DR schemes will fall into one of the following groups, depending on their circumstances.

These circumstances determine what happens next, although customers with more complex affairs may fall into more than one category. These groups are:

1. Customers who have settled with HMRC under the November 2017 disguised remuneration settlement terms or earlier settlement terms

These are customers who have settled all of their DR liabilities, or whose employer has settled all of their DR liabilities, and have either paid in full or have a payment agreement. This group is not liable for the loan charge.

Next steps: customers (both individuals and employers) with payment agreements should pay their agreed instalments and should get in touch if their circumstances change.

Where customers continue to have taxable income that should be reported, they should continue to file Self Assessment returns by the relevant deadlines.

2. Customers who returned their loan charge liabilities and paid in full or agreed a Time to Pay arrangement by 30 September 2020

Customers who did not elect to spread the loan charge should have included the full loan charge in their 2018 to 2019 tax return and paid the full amount or agreed a Time to Pay arrangement.

Where customers elected to spread the loan charge over three years, they should have included a third of the loan charge amount on each of their returns for 2018 to 2019, 2019 to 2020 and 2020 to 2021. These amounts should now have been paid in full or a Time to Pay arrangement agreed.

In cases where a Time to Pay arrangement has been agreed customers should continue to pay in line with the agreed terms. Where the circumstances have changed for customers with a Time to Pay arrangement customers should contact us at the earliest opportunity.

Where customers have not met their filing or payment obligations more information can be found in the following sections:

3.Customers who filed on time but did not pay in full or agree a Time to Pay arrangement by 30 September 2020

4.Customers who did not file

5.Customers who have filed inaccurate returns

3. Customers who filed on time but did not pay in full or agree a Time to Pay arrangement by 30 September 2020

These customers filed their 2018 to 2019 Self Assessment return by the deadline. However, the customer did not pay in full or agree a Time to Pay arrangement by 30 September 2020, and so may have a tax debt.

Next steps: anyone in this position needs to contact us as soon as possible to discuss payment.

For customers unable to pay in full, we can still agree a Time to Pay arrangement. However, they will be liable for late payment penalties and will need to pay interest on any amount owed, charged from 1 February 2020.

For more information on Time to Pay arrangements please review our guidance.

We have set out on this page how we will proceed in relation to customers who do not work with us to agree a payment solution for their outstanding liabilities.

Our focus is firmly on supporting people and working through affordable payment options to stop their liabilities increasing. We can also refer customers for debt advice if this is required.

We will contact customers if we have any questions about their tax return. If we do so and find the information given in the return was not correct, late payment interest will be payable and we will consider charging penalties, including for an inaccurate return. The approach to inaccurate returns is outlined in 5. Customers who have filed inaccurate returns.

For customers who pay the loan charge, we have published settlement terms for any remaining liabilities that arise from open enquiries into DR scheme use.

4. Customers who did not file

Customers who did not file their 2018 to 2019 Self Assessment return by 30 September 2020 were liable for late filing penalties and interest on any amount owed. Penalties and interest are charged from 1 February 2020.

For customers who have elected to spread their loan charge liability over three years but have not filed a return for one or more of the three years HMRC will take the following approaches to late filing penalties and the charging of interest:

• customers who did not file their 2018 to 2019 Self Assessment return by 30 September 2020 are liable for late filing penalties. Interest is charged from 1 February 2020

• customers who did not file their 2019 to 2020 Self Assessment return by 31 January 2021 are liable for late filing penalties. Interest is charged from 1 February 2021

• customers who did not file their 2020 to 2021 Self Assessment return by 28 February 2022 are liable for late filing penalties. Interest is charged from 1 February 2022

If customers have not filed their return we may issue a formal determination, which enables HMRC to pursue an estimated amount of tax as encouragement to customers to file their outstanding return and pay what is due. Customers should be aware that if they pay the amount of the formal determination, they are still obliged to file their outstanding return and will continue to incur penalties until they do so.

Discovery assessments

For customers who have not been issued a determination, we may issue a formal discovery assessment for the amount of liabilities arising from the loan charge that we believe are due. Customers can appeal the assessment and ask for the tax to be postponed pending their appeal.

Customers who appeal can still approach us to settle under the 2020 settlement terms.

5. Customers who have filed inaccurate returns

If we find the information given in any tax return was not correct or was incomplete, we will work with customers to try to resolve their tax position and can discuss payment arrangements if a customer needs support with any increase in tax liability.

Penalties and interest

Late payment interest will be chargeable and we will consider charging penalties, including for inaccurate returns.

Inaccuracy penalties

We will not charge an inaccuracy penalty unless:

• the inaccuracy is an error related to avoidance arrangements and reasonable care was not taken (see below paragraph on reasonable care and tax avoidance arrangements)

• we have evidence to suggest the customer’s behaviour is careless or deliberate

Where we have previously told a customer that we believe they have received income which they need to report on a tax return and they have not done so, we may investigate reasons for inaccuracies and charge a penalty if appropriate.

If we are unable to agree a tax position with a customer we will continue investigating until we can issue conclusions and assessments which can be appealed before the tribunals and courts.

See section 8. Employers who were required to operate PAYE on loan charge amounts for details of inaccuracy penalties for employers.

Reasonable care and tax avoidance arrangements

For avoidance arrangements entered into on or after 16 November 2017, where there are any inaccuracies in a customer’s return relating to the tax avoidance arrangements, HMRC will presume reasonable care has not been taken, and may charge an inaccuracy penalty. If the individual or employer believes reasonable care was taken, they will have to demonstrate this to HMRC.

Further details of HMRC’s approach to reasonable care and tax avoidance arrangements can be found on this page.

Customers (including employers) should also be aware that reasonable care is further limited in relation to disqualified advice relating to tax avoidance arrangements.

Additional Information (AI) penalties

Customers should have included the loan charge on a Self Assessment tax return for the 2018 to 2019 tax year. As well as this, customers were required to report details of outstanding DR loans to HMRC on or before 30 September 2020 on the loan charge Additional Information form. This form was used for customers to accurately report any outstanding DR loans that are subject to the loan charge.

HMRC has the power to issue AI penalties to customers who did not provide this information. HMRC will prioritise issuing AI penalties to customers who failed to report details of extensive DR use, for example those who used a high number of DR schemes over a long period of time.

Customers who did not complete the loan charge reporting form but who provided the correct information in another format will not receive a penalty for failing to submit the AI form.

AI penalties do not affect any other penalties or interest that may be due. For example, HMRC may still issue separate penalties to any customers who failed to declare the loan charge on time or reported it inaccurately, irrespective of whether an AI penalty has been issued.

Discovery assessments

For customers where we did not open an enquiry into their return, we may issue a formal discovery assessment for the amount of loan charge liabilities we believe are due. They can appeal the assessment and ask for the tax to be postponed pending their appeal.

Customers who appeal can still approach us to settle under the settlement terms.

6. Customers who have settled and who may be due a refund or waiver following the independent review

Customers who concluded a DR settlement with HMRC between 16 March 2016 and 11 March 2020, which included tax paid voluntarily in respect of any tax year up to and including 2015 to 2016, may have been eligible for a refund or to have future settlement instalment payments waived.

The deadline to apply for a refund or waiver has now passed and HMRC no longer issues application forms. We have published guidance on our process for refunding payments of voluntary restitution.

7. Customers who no longer have to pay the loan charge but have not settled all of their use of DR schemes

These are customers who have used DR schemes that are outside the scope of the loan charge, for example because loans were made prior to 9 December 2010, and HMRC may still have open enquiries.

The independent review was clear that HMRC should continue with enquiries, settling cases where tax is due but loans now fall outside the scope of the loan charge.

HMRC published settlement terms in August 2020. These were expanded in November 2020 so that any customer can use them to settle DR schemes, whether or not they are in or out of the scope of the loan charge.

Under these terms customers agree to pay Income Tax, NICs (if applicable), late payment interest and, where relevant, Inheritance Tax charges (generally Inheritance Tax can arise where a scheme uses a trust as a third party).

For customers who choose not to settle we will continue investigating their scheme use until we can issue conclusions and assessments which can be appealed before the tribunals and courts.

As the litigation process could take several years, customers who adopt this course of action could risk paying additional legal costs and interest.

The tax still needs to be paid even where the loan charge does not now apply. The new settlement terms are broadly similar to those HMRC has offered scheme users since 2017. However, they have been updated to ensure they are consistent with the law as it stands today.

Other customers who do not have to pay the loan charge

HMRC will not apply the loan charge to a tax year where an enquiry had been opened into a customer’s use of a DR scheme, and the enquiry was subsequently closed with the conclusion that tax was not due on any loans received.

8. Employers who were required to operate PAYE on loan charge amounts

The loan charge affects UK employers still in existence on 5 April 2019 who had provided loans through DR tax avoidance if, on or before 5 April 2019, their employee or former employee had not repaid their loans. These employers were required to operate PAYE on outstanding loans.

Late filing penalties for employers

HMRC approach: HMRC has instructed employers to report the loan charge by submitting an Earlier Year Update (EYU) via PAYE.

There are no late filing penalties in these circumstances. However, there are penalties for failure to pay PAYE and NICs on time. These penalties are administered by HMRC on a risk-assessed basis, e.g. by reference to the employer’s previous number of defaults. We will continue to take this approach.

Inaccuracy penalties for employers

We will contact employers if we have any questions about their PAYE returns. If we find the information given in the return was not correct, tax, NICs and late payment interest may be payable and we will consider charging penalties for an inaccurate return.

However, where an employer has submitted an inaccurate amount for the loan charge we will take a similar approach to that of inaccuracy penalties relating to individuals, for example we will not charge an inaccuracy penalty unless:

• the inaccuracy is an error related to avoidance arrangements and reasonable care was not taken (see paragraph on reasonable care at 5. Customers who have filed inaccurate returns)

• we have evidence to suggest the employer’s behaviour is careless or deliberate

The agency rules and ‘deemed’ employment

The agency rules, set out in section 44 ITEPA 2003, determine who should operate PAYE where more than one party is involved in the provision of a worker’s services. Where the rules apply from 6 April 2014, it normally means an employment agency is responsible for operating PAYE as if they were the employer (a ‘deemed’ employer) of the worker (a ‘deemed’ employee).

The agency rules do not apply in cases where an employment contract is in place, which is the case in the majority of disguised remuneration tax avoidance schemes. There are also other factors which may mean the agency rules do not apply.

Where a customer provides information to HMRC which indicates that the agency rules may apply, HMRC will consider this information on a case-by-case basis and make a decision based on the specific facts and circumstances of each individual case.

Before a customer makes a claim that the agency rules apply, they should consider taking independent tax advice and ensure they have fully considered the consequences of making such a claim. There may be unanticipated consequences, such as a further tax charge on amounts not ‘made good’.

In many cases the application of the agency rules does not impact on who is liable to pay the loan charge. However, in certain circumstances where the agency rules apply from 5 April 2014 the obligation to pay the loan charge may fall on an employment agency as the ‘deemed’ employer.

Collecting the liability from the employee

HMRC will collect the loan charge due firstly from employers but in cases where that is not possible, it can in some circumstances collect the outstanding amount directly from the employee. This means that HMRC may approach employees to pay the due tax directly to HMRC.

Employees have rights of appeal if we do this.

Collecting the liability from the ‘deemed’ employee (where the agency rules apply)

HMRC may also consider other routes to collect loan charge liabilities from ‘deemed’ employees. In certain circumstances an officer of HMRC may exercise their statutory discretion to decide that it is unnecessary or not appropriate for the employment agency to have operated PAYE in respect of the loan charge. If we make this decision, the likely consequence is that the ‘deemed’ employee is liable to pay the income tax arising as a result of the loan charge.

HMRC will only consider this discretion where we have or intend to issue an assessment or have an open enquiry. We can only consider exercise of the PAYE discretion in relation to income tax liabilities. The PAYE discretion cannot be exercised in relation to NICs liabilities.

HMRC’s exercise of this discretion can be challenged by Judicial Review. Customers also have the normal rights of appeal if they disagree with a tax decision. For example, they can appeal against a decision about the amount of tax due.

Where HMRC collects an employee’s or ‘deemed’ employee’s tax directly from them, that puts them in the same position as in most cases where an employer deducts the employee’s income tax from their salary before they pay the employee and pays the employee’s tax to HMRC. Liability for income tax is always that of the individual, even where an employer pays it over to HMRC on their behalf.

Further tax charge on amounts not made good

For employees whose employers were required to operate PAYE on their loan charge amounts, the employer may not have been able to deduct the tax due from other payments made through PAYE.

If their employer was unable to deduct some or all of the tax from their pay through PAYE, the employer was still required to account to HMRC for the amount they were unable to deduct. The employee may then have reimbursed this amount to their employer, referred to as ‘making good’.

If the employee did not make good the amount the employer was unable to deduct within 90 days of the end of the tax year in which the employer should have operated PAYE on the loan charge amounts, they are liable to a further tax charge under section 222 ITEPA 2003 (the s222 charge). This is the case even if the employer did not operate PAYE as required and includes situations where there is a deemed employer and deemed employee because the agency rules apply.

We will collect the charge through our enquiry into the relevant tax return or when we issue discovery assessments.

However, where an employee is liable to a s222 charge on the loan charge but is settling their tax position with HMRC, we will not collect the s222 charge where certain conditions are met. Section 14.2 of our DR 2020 settlement terms provides more information on this.

Customers subject to the loan charge

HMRC’s estimate of the number of individuals expected to be affected by the loan charge prior to the changes made following the independent review is approximately 61,000. This estimate is based on actual cases identified.

Following the independent review around 9,500 individuals and 2,500 employers have been removed from the scope of the loan charge.

Since Budget 2016, and by the end of March 2022, we have agreed around 20,200 settlements with employers and individuals, bringing into charge around £3.4 billion. These figures include settlements with customers who used DR, including those within the scope and outside the scope of the loan charge.

Complaints

If customers have concerns about the way that HMRC has handled their tax affairs they should use the complaints procedure outlined on GOV.UK as soon as possible.