Pension contributions can be used to relieve LC19

[webberg]

Does 554Z11 not say that where tax has been paid on the loan value in earlier periods, then the tax is basically a credit against the DR charge?

[Loan Ranger]

So, the scenario is:

2009/10 - you received a loan
2018/19 - you pay the LC and make pension contributions to relieve the tax (this still leaves enquiries open)
2021 - you decide to settle

That's a bit of a mess isn't it. How does HMRC work out what you need to pay in 2021 to settle?

[Iliketax]

Does not 554Z5 say that where a liability on the sum has become due in an earlier period, then the loan value is removed from the DR charge?

How can that work as neither the payment condition nor the liability condition is satisfied? Both look at the time that the relevant step is taken which is 5 April 2019. Not some later time.

[Iliketax]

Does 554Z11 not say that where tax has been paid on the loan value in earlier periods, then the tax is basically a credit against the DR charge?

No, s554Z11 is to do with the remittance basis.

[webberg]

So, the scenario is:

2009/10 - you received a loan
2018/19 - you pay the LC and make pension contributions to relieve the tax (this still leaves enquiries open)
2021 - you decide to settle

That's a bit of a mess isn't it. How does HMRC work out what you need to pay in 2021 to settle?

My view is that in 2021 you agree with HMRC that you should have paid tax in 09/10.

If the loan in 09/10 is treated as income for that year, then my understanding is that it will not be taxed again in 18/19 under the DR charge (554Z5).

If this is true, then there is a call to be made on how much pension contribution you might want to risk to mitigate the 18/19 liability.

I understand that money in your pension is better than money in HMRC coffers but my assumption is that in real life, most contractors have a finite amount of cash and if that is used to pay a pension contribution and later a liability (in this case in 09/10) pops up, along with a refund for 18/19 I assume, I'm interested in whether the net cash outflow is more than the limit of funds available.

[webberg]

The example I'm playing with.

Loans in 11/12 and 12/13 of £50k each.

Income in 18/19 from other sources £50k.

Income assessed in 18/19 is £150k.

You pay a pension contribution of say £120k.

You pay tax on £150k, less £120k, less PA (guess) £12k = £18k at 20% = £3.6k.

After 2019, you agree with HMRC that tax was due in 11/12 and 12/13 of £15k each year.

The DR charge is accordingly reduced because you have paid tax on the loans.

Your 18/19 position is now no tax due as your pension contribution exceeds your income. Refund £3.6k.

In cash terms.

Pre settlement of earlier years.

Pension paid £120k. tax paid £3.6k. Total £123.6k.

Post settlement of earlier years.

Pension paid £120k, tax paid £30k, refund £3.6k. Total £144.4k.

Various commentators here are, I suspect, more advanced in thinking over this point and in the interests of sharing public information, I'd be interested in their views.

[Iliketax]

The example I'm playing with.

Loans in 11/12 and 12/13 of £50k each.

Income in 18/19 from other sources £50k.

Income assessed in 18/19 is £150k.

You pay a pension contribution of say £120k.

You pay tax on £150k, less £120k, less PA (guess) £12k = £18k at 20% = £3.6k.

After 2019, you agree with HMRC that tax was due in 11/12 and 12/13 of £15k each year.

The DR charge is accordingly reduced because you have paid tax on the loans.

Your 18/19 position is now no tax due as your pension contribution exceeds your income. Refund £3.6k.

In cash terms.

Pre settlement of earlier years.

Pension paid £120k. tax paid £3.6k. Total £123.6k.

Post settlement of earlier years.

Pension paid £120k, tax paid £30k, refund £3.6k. Total £144.4k.

Various commentators here are, I suspect, more advanced in thinking over this point and in the interests of sharing public information, I'd be interested in their views.

So help me with the comment I've highlighted in bold. Specifically, why do you say that? You've mentioned s554Z5 (which does not seem to apply) and s554Z11 (which is not relevant). You must have a reason for saying it is "accordingly" reduced. But at the moment I don't understand what the reason for you saying that is. And that sentence does seem to be the key.

[Loan Ranger]

The only guidance I've seen from HMRC is in the case of settlement before 5/4/19.

I've not seen anything about what happens if you settle after paying the LC.

My guess is they're not expecting that to happen. They will have more than enough on their hands:

1) identifying all the people who have loans, especially old loans and closed years
2) dealing with people who don't provide information on their loans by 31 Sept 2019
3) dealing with people who don't declare their loans through SA by 31 Jan 2020
4) dealing with people abroad
5) defending all the inevitable legal challenges
6) enforcing collection, payment plans & bankruptcies
7) BG

Rather them than me!

[webberg]

So help me with the comment I've highlighted in bold. Specifically, why do you say that? You've mentioned s554Z5 (which does not seem to apply) and s554Z11 (which is not relevant). You must have a reason for saying it is "accordingly" reduced. But at the moment I don't understand what the reason for you saying that is. And that sentence does seem to be the key.

Let's assume for the time being that your literal analysis is correct.

If the situation is that the DR charge cannot be reduced despite HMRC claiming that they will continue their enquiries, then in my example, it's possible that the final position is:

Pension paid £120k, tax paid 18/19 £3.6k, tax paid for earlier years £30k. Total £153.6k

Is that correct?

So despite the liability condition arguably being met, unless you settle before 5/4/19, there is double tax?

Is that correct?

You are correct on 554Z11. I meant to reference 554Z11B and C. My apologies.

[Iliketax]

unless you settle before 5/4/19, there is double tax?

Is that correct?

No.

You are correct on 554Z11. I meant to reference 554Z11B and C. My apologies.

The way that s554Z5 works is to reduce the value of the relevant step. So if the outstanding loan was for £10,000 and the loan that you are paying tax (at whatever rate) was £10,000 (so there is no overlap) and the earlier tax has been paid by 5 April 2019 (or you've agreed time to pay) then the value of the relevant step is reduced to nil. You've previously said you do not agree with my analysis on this. You've mentioned your tea towel but you've never said why you disagree. So let's pretend you agree with it. In this case (i.e. settling before 5 April 2019) then the 'outstanding' loan is not charged to tax and so you have no ability to relieve pension contributions as there is no April 2019 loan charge.

But that is absolutely not what your example is about. You say that the settling is after 5 April 2019. As I've said, s554Z5 is just not relevant then.

So then you get to s554Z11B and s554Z11C. These do not reduce the value of the 5 April 2019 loan charge relevant step. What they say is that (if there's an overlap, which there will normally be) then the tax that you pay counts against both tax charges. So you have two tax charges. First on the April 2019 loan charge (the "Chapter 2 overlap charge") and secondly on the earlier charge. As you've paid the April 2019 loan charge by then, this will be the "Chapter 2 overlap paid amount". This amount is then set against the earlier tax charge and (if there's any left, against interest on late tax on that earlier charge). The earlier charge is relation to the 2011/12 and 2012/13 thing that you've settled.

So there is no double tax. There is no reduction in 2018/19 income. But as with all things to do with this, I think you should take independent professional tax advice.