Reply to: The LC is like a Payment on Account

[webberg]

Webberg, I know pension offset was mentioned previously as an option for the LC for closed year, now that it only applies to open years, can it still be used ?
eg £240k of loans , received over 4 years post 2011, settlement cost is £80K, if LC is calculated over 3 years and is in addition to a salary, so is all charged at 40% it would be £80k * 40% X 3= £32k X 3 = £96K.

So since you have paid more in LC than settlement, you could settle for nothing.

If you were to make an £80K pension contribution in 2018/19, 2019/20 and 2020/21 (I realise it is now too late fore 2018/19), and so in effect offset the £96K loan charge, could you still then finalise settlement for nothing ?

1. Loan charge is NOT settlement.

2. Loan charge paid is eventually offset against tax due for the year in which loans were received.

3. If the loan charge paid is LESS than the final tax plus interest due, then more money will be due.

4. Loan charge cannot apply to years prior to 9th December 2010, not to years between then and 5th April 2016, which were disclosed but HMRC took no action. therefore the "net relevant earnings" for pension relief purposes should be calculated including just years in charge.

5. If your loan charge payment is MORE than the final tax plus interest due, there is a real risk that you will NOT be able to recover the excess.

6. Ultimately the MINIMUM tax due if you settle is the tax and interest (and perhaps NIC in some cases) that is attributable to the years HMRC has validly got under enquiry, after taking into account all relevant tax reliefs.

In your case I suggest you go and speak to an adviser who is knowledgeable.

[DealorNoDeal]

Webberg, I know pension offset was mentioned previously as an option for the LC for closed year, now that it only applies to open years, can it still be used ?
eg £240k of loans , received over 4 years post 2011, settlement cost is £80K, if LC is calculated over 3 years and is in addition to a salary, so is all charged at 40% it would be £80k * 40% X 3= £32k X 3 = £96K.

So since you have paid more in LC than settlement, you could settle for nothing.

If you were to make an £80K pension contribution in 2018/19, 2019/20 and 2020/21 (I realise it is now too late fore 2018/19), and so in effect offset the £96K loan charge, could you still then finalise settlement for nothing ?

If you've paid the LC, then:

Cost to subsequently settle = Settlement tax - LC tax already paid

The question is, how does HMRC calculate "LC tax already paid"?

If you've used pension contributions to wholly relieve the LC, then have you paid any LC tax at all? Does "LC tax already paid" = 0?

[Albert49]

Offset LC with pension

Webberg, I know pension offset was mentioned previously as an option for the LC for closed year, now that it only applies to open years, can it still be used ?
eg £240k of loans , received over 4 years post 2011, settlement cost is £80K, if LC is calculated over 3 years and is in addition to a salary, so is all charged at 40% it would be £80k * 40% X 3= £32k X 3 = £96K.

So since you have paid more in LC than settlement, you could settle for nothing.

If you were to make an £80K pension contribution in 2018/19, 2019/20 and 2020/21 (I realise it is now too late fore 2018/19), and so in effect offset the £96K loan charge, could you still then finalise settlement for nothing ?

[DealorNoDeal]

Indeed I'm expecting a new settlement "opportunity" which will take us to 30 September 2020.

How generous that may be, remains to be seen.

If they want to encourage mass settlement, they need to think outside the box, be radical and flexible.

Eg. how about collecting it through a special tax code?

Tax codes - GOV.UK

[DealorNoDeal]

We will continue to disagree on whether HMRC can ignore their legal obligations and not pursue open enquiries.

Not ignore but leave them "pending". They're not breaking any statute if enquiries are left open for 20/30/50 years. I bet you have some members, who were in schemes in the early noughties, who have open enquiries dating back 15 years or so.

Goverment would be well pissed off with them if they wasted time/resources on people who'd paid the LC.

[webberg]

Whilst I think HMRC has been humiliated by the LC debacle, my reading of internal changes they are making is that they have decided to stop digging the hole deeper and instead the new team looking at this have been instructed to end the embarrassment as quickly and quietly as possible.

So I think revenge is not on their agenda.

Indeed I'm expecting a new settlement "opportunity" which will take us to 30 September 2020.

How generous that may be, remains to be seen.

I like "enabler of the resistance". I may put that on my business cards.

We will continue to disagree on whether HMRC can ignore their legal obligations and not pursue open enquiries.

[DealorNoDeal]

HMRC has been humiliated by the loan charge review.

Yes, and if they're out for revenge, it will be all those who've escaped the LC who will be firmly in their sights.

You're probably on their black list too as an "enabler" of the resistance.

I'm sticking with my prediction. Anyone who pays the LC will be way down on their list of priorities.

[webberg]

OK, let's think about that.

(Obviously the following only applies to open years. Once you've paid the LC for a closed year, that's the end of the matter.) Not sure I follow the logic here?

Let's assume you pay the LC and then do nothing. Your tax appeal is just left dormant.

What could happen to change this dormant state? The only two things I can think of are:
1) HMRC issues you with a Closure Notice No. A closure notice is the end of an enquiry - and the start of the litigation process if you chose it to be - and I very much suspect/know that HMRC is gearing up for this right now.
2) HMRC issues you with a Follower Notice because your scheme has been defeated at tribunal Entirely possible

(1) doesn't seem very likely, given that they'll be focusing their attention on pre-2010 open years which aren't covered by the LC I disagree. HMRC is organised internally into two units, one if "legacy", by which they mean pre Dec 2010 and one is post legacy. Both have been tasked with closing loan schemes following the review debacle. There was the announcement made that HMRC would be funding a team to challenge all years. In my view we will be seeing action here at the end of the summer.

(2) could be many years into the future Again I disagree. Hoey has been heard and decided in favour of HMRC. I understand that case will be back to UTT this Autumn. A decision pre Christmas will see FN's in Q1 2021.

I do get what you're saying - I really do.

However, we are in the end days of enquiry etc and it's time to face some harsh realities.

HMRC has been humiliated by the loan charge review. Any HMRC policy maker involved in that mess should, if they had any honour or integrity, resign. They won't. Instead a new team has been tasked with the clean up and whilst that might mean slightly better terms on the next settlement offer (CLSO 3), I'm not holding me breath. Instead we will see an acceleration of the process required to bring all enquiries to an end.

So to all those out there who see LOAN CHARGE as an ALTERNATIVE to SETTLEMENT or agreement - it's not.

Do the timing/cost equation above and decide if one or either is affordable.

if not, understand that the alternative is litigation (which may or may not win).

[DealorNoDeal]

In this example, when does the £200k become due?

OK, let's think about that.

(Obviously the following only applies to open years. Once you've paid the LC for a closed year, that's the end of the matter.)

Let's assume you pay the LC and then do nothing. Your tax appeal is just left dormant.

What could happen to change this dormant state? The only two things I can think of are:
1) HMRC issues you with a Closure Notice
2) HMRC issues you with a Follower Notice because your scheme has been defeated at tribunal

(1) doesn't seem very likely, given that they'll be focusing their attention on pre-2010 open years which aren't covered by the LC

(2) could be many years into the future

[webberg]

Why? In my example...

Settlement of £200k, even over the longest TTP HMRC will agree to, might be a financial ruin situation.

Whereas, £100k LC spread over 3 years with possible further TTP, might be manageable.

Btw, if you haven't already registered for a settlement, is there even a choice in the matter? Aren't you stuck with paying the LC?

In this example, when does the £200k become due?

There are three choices.

1. Upon settlement - say June 2020
2. Upon withdrawing appeals after cases are heard - say June 2021
3. Upon failure of litigation - say June 2022

Let's assume that the same loans under the spread loan charge (LC3 as we call it) produces the £100k charge you mention and it falls due 31/1/20 (£33k), 31/1/21 and 31/1/22 of £33k each.

Under 1 above, you settle and let's say interest has added another £3k.

You owe £203k of which you have paid £33k via the loan charge in 11 days time. The balance of £170k will be subject to a TTP of between say 2 and 12 years depending upon circumstances, to which you can add some forward interest. Let's say though you get 7 years to pay and we ignore forward interest (because I'm on a train and cannot calculate it easily), you have paid

January 2020 = £33k
July 2020 to June 2027 = £2,023 a month.

Under 2 above, you withdraw appeals and with interest, you owe £209k. By then you have paid £33k in January 2020 and another £33k in January 2021. You owe £143k which again may be subject to a TTP which you might hope would be as generous as the settlement in option 1 above. You have paid:

Janaury 2020 = £33k
January 2021 = £33k
July 2021 to June 2028 = £1,702 a month


Under 3 above, you lose the litigation and now owe £215k including interest. You will have paid £99k in loan charge and consequently owe £116k following litigation. This falls due in June 2022 but may also be subject to a TTP. You have paid:

January 2020 = £33k
January 2021 = £33k
January 2022 = £33k
July 2022 to June 2021 = £1,380 a month

If you settled rather than pay the loan charge and also get 7 years to pay, you pay

July 2020 to June 2027 = £2,380 a month

Forward interest will make a difference.

[DealorNoDeal]

I also question the benefit of "buying time".

Why? In my example...

Settlement of £200k, even over the longest TTP HMRC will agree to, might be a financial ruin situation.

Whereas, £100k LC spread over 3 years with possible further TTP, might be manageable.

Btw, if you haven't already registered for a settlement, is there even a choice in the matter? Aren't you stuck with paying the LC?

[webberg]

Both true.

However, unless money is no problem, given the choice between paying £100k LC and £200k settlement, some may opt for the former. Even though they may have to come up with another £100k at some point in the future. The key thing for some people will be that "some point in the future" is not NOW. Paying the "cheaper" LC buys time.

As I said, the LC/settlement route is essentially a time to pay arrangement.

My view is that HMRC is being relatively generous about time to pay anyway and if your preference is to ultimately settle then going that way and agreeing a time to pay is likely to be a more flexible and affordable (in terms of timing) route.

Going into the loan charge process and then unpicking it later, means that you need HMRC to

a. understand the process
b. be able to match all the payments made and reallocate them
c. possibly pay an agent to sort out the inevitable confusion

I also question the benefit of "buying time".

[DealorNoDeal]

Doesn't stop interest accumulating on the underlying amount. In some cases, that can be quite sizable.

It also does not resolve the underlying enquiry - therefore it does not bring "closure", which is probably what many are looking for.

Both true.

However, unless money is no problem, given the choice between paying £100k LC and £200k settlement, some may opt for the former. Even though they may have to come up with another £100k at some point in the future. The key thing for some people will be that "some point in the future" is not NOW. Paying the "cheaper" LC buys time.

[lowpaidworker]

It's not a bad idea, just one that does not work.

If you have an open year and the liability is £20,000, then that is ultimately the sum due.

If the loan charge falls due and is £15,000 - when that falls due is irrelevant for this purpose, then all you have achieved is some form of payment plan.

You have paid (indeed may be legally obliged to pay) the loan charge and then you need to pay the balance - in this example £5,000 - sometime later, i.e. upon settlement.

So the loan charge/settlement/agreement equation ALWAYS comes to the same net outflow from your bank account.

The timing of the payments may vary and clearly the later tax due is actually paid will increase interest charges, but there is no question of the loan charge route being cheaper.

thanks for the explanation.

So no point really opting for the LC. Better off agreeing a settlement if you are looking to settle.

[webberg]

I don't know if HMRC regard the LC as a PoA but webberg has mentioned it a few times, and I'm not disagreeing.

If it is like a PoA, then what's wrong with paying it (instead of settling) if it costs less? (Now that you can spread the LC over 3 years it might work out cheaper than settling for many more people.)

Sure, you may have to hand over more at some point in the future, but so long as people understand this, what's wrong with going down this route?

Why, as has been alluded to on several occasions, is this a bad idea?

It's not a bad idea, just one that does not work.

If you have an open year and the liability is £20,000, then that is ultimately the sum due.

If the loan charge falls due and is £15,000 - when that falls due is irrelevant for this purpose, then all you have achieved is some form of payment plan.

You have paid (indeed may be legally obliged to pay) the loan charge and then you need to pay the balance - in this example £5,000 - sometime later, i.e. upon settlement.

So the loan charge/settlement/agreement equation ALWAYS comes to the same net outflow from your bank account.

The timing of the payments may vary and clearly the later tax due is actually paid will increase interest charges, but there is no question of the loan charge route being cheaper.