CLSO2 or Self Assessment 2018/19 for Loan declaration

[TomG]

Hi All,

I would very much appreciate if some of you can help me as I am quite confused. My apologies if this has been answered in another thread.

I was with Winchester (Self Employment) scheme in 2012-13 and early 2013-14 and have a loan amount plus 100K which I am planning to voluntarily declare to HMRC.

However I am confused whether I should go for Settlement under CLSO2 or declare that as part of my SelfAssessment in 2018-19.

I would have preferred settlement route however downside specific to my situation is that I will be paying 40% tax on full loan amount as my income in both years (year 13 and year 14) were around 42K.

By taking 18-19 self assessment route then I will be able to save quite a lot tax by mainly declaring loan amount as earning in 2018-19 Self Assessmen and not declare anyother income since we can run house on my wife's income. However I am not sure how whether SA18-19 declaration will be full settlement and what it will entail apart from loan amount?

I spoke to a tax adviser and he suggested that if I declare the loan as part of SelfAssessment 18-19, It would also be required to add the total commission paid to provider with loan amount as part of Loan Charge also chances are it may not be complete settlement. How correct is that?
What do we need to include if we declare previous year loan amounts in SA18-19 and mention in white space of SATR?


My apologies as this is more of my person situation however I am sure it will also help many.

Therefore some suggestions will be really helpful.

[Loan Ranger]

I spoke to a tax adviser and he suggested that if I declare the loan as part of SelfAssessment 18-19, It would also be required to add the total commission paid to provider with loan amount as part of Loan Charge also chances are it may not be complete settlement. How correct is that?

That does not sound right. The charge is levied against the outstanding loans ie. the amounts that were lent to you.

Settling will close the enquiries into your tax returns. Paying the charge will not.

Opinions differ as to whether paying the charge will end the matter.

Have a read of the last page of this PDF which covers CLSO2.
LC19 - Pension Contributions v3

[TomG]

That does not sound right. The charge is levied against the outstanding loans ie. the amounts that were lent to you.

Settling will close the enquiries into your tax returns. Paying the charge will not.

Opinions differ as to whether paying the charge will end the matter.

Have a read of the last page of this PDF which covers CLSO2.
LC19 - Pension Contributions v3

Many thanks for your reply Loan Ranger. It certainly is useful document.

However if you can clarify couple of terms it will be quite useful.

"Paying the charge" means declaring as part of 2018-19 SA right?

Also in your document you have mentioned term "Other income" however as far as I have understood pension contribution can only be used for UK earning (mainly PAYE as in Salary income) and even excludes dividend or any other income for example: rental income or bank interest etc. right?

So does that mean to offset tax on loan first we will have to withdraw 40K from Limited company (for those who are now contracting under LTD company) as Salary/PAYE, to be able to utilise full Pension annual allowance. Is that correct?

Would appreciate your view on that.

Thanks..and keep enhancing your document it's useful for many of us.

[Loan Ranger]

For LC19, you have to provide HMRC with information on the loans by 30 September 2019. I don't know what happens after that. Perhaps they will issue an assessment?

Yes, pretty much you can only claim pension tax relief on earnings.

LC19 counts as earnings so, even if you don't earn anything else in 2018/19, you can still make pension contributions and get tax relief on the charge.

[TomG]

For LC19, you have to provide HMRC with information on the loans by 30 September 2019. I don't know what happens after that. Perhaps they will issue an assessment?

Yes, pretty much you can only claim pension tax relief on earnings.

LC19 counts as earnings so, even if you don't earn anything else in 2018/19, you can still make pension contributions and get tax relief on the charge.

Thanks so in clear terms here is what I understood ..please correct if that's not right.

LC19 route
------------------
------------------
In SA 18/19 I can declare

Trust Loan = 100K
Paye = 0
---------------------
Total earnings= 100K

Make pension contributions = 80K (may be utilising last year)

Net Earnings for Tax = 100K - 80K = 20K

Pay tax on 20K....right?

Outcome: Full settlement and IHT issue will remain open with HMRC


Settlement Route(CLSO2)
-----------------------------
----------------------------

Trust Loan = 100K (voluntarily declaration)

Pay 40% paye tax = 40K
Pay Class 2 NI = ?
Class4 NI tax (9%) = 9K (since its self employed scheme)

these are just rough estimates tax though...

Outcome:Settlement agreement with HMRC for those years

[Loan Ranger]

Thanks so in clear terms here is what I understood ..please correct if that's not right.

LC19 route
------------------
------------------
In SA 18/19 I can declare

Trust Loan = 100K
Paye = 0
---------------------
Total earnings= 100K

Make pension contributions = 80K (may be utilising last year)

Net Earnings for Tax = 100K - 80K = 20K

Pay tax on 20K....right? 20k - personal allowance

Outcome: Full settlement and IHT issue will remain open with HMRC yes, although IHT may still be an issue even if you settle


Settlement Route(CLSO2)
-----------------------------
----------------------------

Trust Loan = 100K (voluntarily declaration)

Pay 40% paye tax = 40K yes, if you were already a 40% tax payer in those years due to other earnings
Pay Class 2 NI = ?
Class4 NI tax (9%) = 9K (since its self employed scheme)

these are just rough estimates tax though...

Outcome:Settlement agreement with HMRC for those years

Presumably you've said "voluntarily" because HMRC haven't opened enquiries or issued discovery assessments?

If they had, you'd have to pay interest on top with CLSO2.

[TomG]

Presumably you've said "voluntarily" because HMRC haven't opened enquiries or issued discovery assessments?

If they had, you'd have to pay interest on top with CLSO2.

Yes thats right, I have no open enquiry or Discovery Assessment hence why I mentioned "Voluntarily Declaration"

Any link from HMRC where it has been made cleat that pension can be used to mitigage Loan tax under LC19?
as it could be quite risky proposition if HMRC does not agree and say you had no salary/paye no pension contribution should have been done.

Also this may not worth but just worth finding: "Can the pension contribution done from contractor limited company be used or should it be personal pension contribution?

[Loan Ranger]

Any link from HMRC where it has been made cleat that pension can be used to mitigage Loan tax under LC19?
as it could be quite risky proposition if HMRC does not agree and say you had no salary/paye no pension contribution should have been done.

Also this may not worth but just worth finding: "Can the pension contribution done from contractor limited company be used or should it be personal pension contribution?

There's a link to an FOI response from HMRC in the PDF.
LC19 - Pension Contributions v3

I think it has to be personal pension contributions.

[TomG]

There's a link to an FOI response from HMRC in the PDF.
LC19 - Pension Contributions v3

I think it has to be personal pension contributions.

referring to the following link where Webberg is mentioning 3% interest per year on top of the outstanding loan amount.

https://forums.contractoruk.com/hmrc...-charge-3.html

Whats your view on that?

As in settlement no interest is added on voluntarily declaration.

So if the interest is added to the loan amount in LC19 then it could be quite a bad situation as it will clear substantial part of gain made through pension contribution:-(

So whats the certainty or rather process that interest will also be added during loan charge considering we are adding this as part of SA18-19?
May be Webberg can shed some light...

[webberg]

Using CLSO 2 will result in tax being due for each year a loan was made.

Where the year is "open", i.e. you have an unresolved HMRC enquiry, interest will be added. Since early 2009 the interest rate has been at or around 3% pa. Simple interest calculation from due date to date of payment.

Where the year is "closed" i.e. no HMRC enquiry, then HMRC claim that "by concession" they will not charge interest. In fact, the law does not permit an interest charge as interest can arise only on tax and a voluntary payment is not tax.

The DR Charge becomes due, so we are told, 31st January 2020. If it's paid at that time, no interest arises on that charge.

The interaction between the DR charge and earlier years liability is a complex one and I recommend that you seek advice as this will have a part to play in your deliberations.