Got a loan charge bill that you can’t pay in one go? Use our case study to understand your options

Introduction

Arranging payment of what you owe is one of the final steps in dealing with the loan charge. We know lots of people aren’t at this stage yet, but we also know that it can be hard taking even the first steps required to bring your tax affairs up to date, when you don’t know what to expect.

HMRC have support in place to help taxpayers to pay what they owe but understanding the different processes available can be difficult, and there is sometimes misinformation circulating online. To help demystify things, here we provide you with some insight as to what might happen. We use a case study to help you understand the options and how all the considerations might apply in real life.

  To understand how much you owe, you will either need to have reported the loan charge yourself, reached agreement with HMRC or accepted HMRC’s figures. We know some people have not yet taken any action at all with these things. If you are feeling overwhelmed and don’t know where to start - things may not be as bad as you think and there is lots of help available. This includes from TaxAid if you are on a low income and cannot afford to pay for professional advice. 

Default route

This route basically means that HMRC will try and deal with Max through their established procedures for individual aspects of his situation. So, for instance, if Max thinks that he has a reasonable excuse for the late filing and payment penalties, they will need to be appealed through the usual channels. TaxAid may be able to help him do this. He will then need to go to arrange a Time to Pay arrangement in respect of the £5,000 loan charge amount (and any remaining interest and penalties). Max will need to do this directly with Debt Management, once he has confirmed with Counter-Avoidance that his case can move out of their team.

Because it is loan charge related, the Time to Pay arrangement will be based on what he can afford and there’s no limit to how long he can spread payments. HMRC do not expect anyone to pay more than half their disposable income (up to £3,000) after living expenses towards a loan charge debt. Expenditure deducted in calculating disposable income includes essential items, such as household bills, and other reasonable expenses, for example, gym membership, healthcare plans and private school fees. A Time to Pay arrangement can be renegotiated where circumstances change and you need more time. Note that Debt Management have more flexible rules for loan charge debt - these may not be the same for other HMRC debts.

  If your income is less than £50,000 in the last tax year and you have no other source of wealth, HMRC will automatically agree a Time to Pay arrangement spread over 5 years. If your income was less than £30,000 then HMRC will automatically agree a Time to Pay arrangement of 7 years. If you require longer than 5 or 7 years or have an income higher than £50,000, you will need to provide income and expenditure information as part of the standard Time to Pay process.

For more on HMRC’s Time to Pay arrangements and Debt Management’s approach to enforcing loan charge debt see their guidance. 

Pros of formal route

• A Time to Pay arrangement is an established way of paying a tax debt, with lots of guidance on GOV.UK available to help you understand the process, including the income and expenditure form.
• Debt Management are a dedicated team within HMRC specialising in dealing with tax debt. They will not know any background to your debt, however they have loan charge experts within the team to call on, if necessary.
• Debt Management, can, at its own discretion offer remittance of debt where the taxpayer has no ability to pay, until there is a significant change of circumstance. See TaxAid’s guidance under ‘Waiver of tax’. 

Cons of formal route 

• There can be other complexities connected to the loan charge, for example around Inheritance Tax (IHT) (we explain these below under ‘Contract settlement’). This means that although you can arrange a Time to Pay arrangement now based on the amount identified so far, you may be contacted by HMRC at a later date if other issues emerge. Please note that Debt Management will not be able to help with these issues – you will need to go back to the relevant tax operations teams, for example Counter-Avoidance.
• If this happens, it may be difficult and stressful, in terms of tracking which aspects of your case are ‘closed’, and which remain open (with whom, and for how long).
• Statutory interest will run on any Time to Pay arrangements automatically until such time as the amount you owe is paid. The interest rate is calculated as Bank Base Rate plus 2.5%. At the time of writing, the HMRC rate is 7.5%. It is important that anyone who is considering entering into a Time to Pay arrangement with HMRC, understands the impact that late payment interest may have on the overall amount owed. The interest may be high, or at least higher than you were expecting, and it may now be a more significant consideration, although HMRC’s rates may be lower than other creditors.
• As the interest tracks the Bank Base Rate it may go up (or down) in the future, so there is an element of the unknown.  

Contract settlement

A contract settlement is basically an agreement made with HMRC whereby you offer to pay a specified amount (either as a lump sum or in installments) in exchange for HMRC agreeing to give up its rights to proceed formally for the tax, interest and penalties. Your offer is legally binding once signed by you and accepted by HMRC. To help you make your offer, HMRC will send a draft ‘letter of offer’ for you to use which includes all the figures and terms. We include an example of this letter later on.

A contract settlement can be used to resolve outstanding tax issues, such as those arising out of an enquiry or assessment, with the benefit of covering issues across multiple tax heads in a ‘once and done’ approach. A determination is not the same as an enquiry or assessment (although one of these could be the next step if HMRC disagree with the figures that Max has included on his 2018/19 tax return). However, HMRC have offered Max a chance to enter into a contract settlement because sometimes people who have a loan charge bill may also have one or more of the following:

• An open earlier enquiry or assessment into loans covered by the loan charge, that still needs to be resolved (even if this is only to grant Residual Tax Relief as part of the settlement process).
• IHT issues (quite rare).
• A section 222 charge (although again, HMRC may be able to negate this as part of the settlement process).
• Late filing and payment interest and penalties.
• Payment difficulties.

Where a contract settlement is entered into, all of the above can be dealt with and included within one overarching agreement. 

Pros of contract settlement 

• Once HMRC have worked your case and come up with a final, global settlement figure and payment schedule, this gives you closure and certainty. (However, note that on rare occasions, HMRC can still issue discovery assessments; and if you have IHT complexities and some or all of your loans are not being written off, you may still need to pay more tax in the future.)
• As part of the contract settlement process, if there are questions of hardship, you can ask HMRC to consider accepting a sub-standard offer. Note, in accordance with their Litigation and Settlement Strategy, it is quite rate that they will do this. However, you should be able to arrange an instalment option as part of a contract settlement – the starting point is that any affordability checks/instalment terms should mirror what happens with Time to Pay arrangements.
• In general, there is very little HMRC will do about interest that has built up on what you owe to date, but HMRC may consider, as part of contract settlement, if there has been an unreasonable delay on its part and reduce the interest appropriately.
• As well as any ‘historic interest’, there will be ‘forward interest’ for any payment arrangements. Interest will be calculated on the reducing balance at a flat rate, which shields you from interest rate fluctuations, but will include a 1% surcharge. 

Cons of contract settlement 

• As is the case with many ‘ordinary’ HMRC transactions, the settlement process can take a long time as it may cover multiple stages of correspondence, sharing information and – as explained below - agreeing calculations.
• Because of the often multiple, complex issues and calculations required in loan charge cases, it can sometimes be difficult to understand HMRC’s final, global settlement figures – they need to be checked extremely carefully. This may prolong the situation – you should remember that interest is running all the while the amount you owe remains unpaid.
• As part of the letter of offer you may have to admit to wrongdoing on your part. Further information about the letter of offer can be found in HMRC’s guidance at EM6300. For a sample, please Click here to view pdf.
• The contract settlement is a binding document – if you default on it HMRC may refer the case to Debt Management to collect the debt. This may involve having a different instalment arrangement (or none at all) but we understand that usually Debt Management will not seek to renegotiate the actual amount of the debt. 

How did Max decide to proceed with his loan charge situation?

Max’s loan charge situation is relatively straightforward, in that there don’t appear to be any earlier open enquiries/assessments, IHT or s222 charge issues. He could enter a contract settlement to deal with the late filing and payment penalties and to arrange payment. The fixed interest rate would give him certainty over the amount of future payments and the conclusive nature of the contract settlement provides him with as much closure as it is possible to have.

However on the other hand, TaxAid can help him navigate the penalty appeals process. He also thinks that interest rates might go down meaning that a Time to Pay arrangement might actually work out a little cheaper for him, and he is willing to take that risk. Even if they don’t, he is worried that entering a contract settlement may complicate and lengthen matters, meaning more interest overall.

In Max’s case, the default route may be considered an easier, quicker, cheaper route however – and we stress - this will have to be determined on a case by case basis. For example, if Max needed to receive Residual Tax Relief to close down any earlier disputes or did not manage to submit his 2018/19 tax return in time to displace the determination and needed ‘special relief’, then the answer may well be different. Similarly, if he received an enquiry or assessment rather than a determination, this may mean the contract settlement process is a better alternative to having to go down the formal route of amendments or appeals.

  If you are offered the chance to enter into a contract settlement and don’t know how to proceed, we strongly advise that you take some professional advice. As explained above, a contract settlement will not be appropriate in all cases, there are many considerations. In any case, it should only ever be considered where you think an agreement with HMRC as to what you owe can ultimately be reached.