August 14 2020

United Kingdom Introduces Income Tax Changes as Part of Finance Act 2020

Source: IBFD Tax Research Platform News

United Kingdom enacted Finance Act (FA) 2020 introducing some key changes to the UK income tax legislation. In particular, those changes concern workers' services provided through intermediaries and changes to the loan charge mechanism as summarized below.

Workers' services provided through intermediaries

The off-payroll rules (IR35) were designed to ensure individuals who are in reality employees but work through an intermediary, such as a limited company, pay the income tax and national insurance contributions of an employee, rather than a self-employed worker.

On 27 April 2020, the House of Lords Finance Bill Sub-Committee released its report entitled "Off-Payroll Working: Treating People Fairly", which in summary argued for caution in extending the rules as there has been evidence that the existing rules were problematic. However, the FA 2020 extended the rules in the following way having effect from 6 April 2021:

  • all public sector clients and medium or large sized private sector clients will be responsible for deciding a worker's employment status; and
  • as a result of the above, if a worker provides services to either public sector or medium-sized or large private sector clients, they should obtain an employment status determination from the client, being provided, however, with the right to dispute it.

Loan charge mechanism

The 2019 loan charge mechanism was announced at Budget 2016 and applied to disguised remuneration loans from as far back as 1999 that were outstanding on 5 April 2019. The loan charge mechanism constitutes an anti-avoidance measure to prevent individuals from being paid in loans instead of a salary and, thereby, avoiding income tax and national insurance contributions. It works by stacking the years so that income received as loans across multiple years is taxed as if it had been paid all in one.

The following changes were introduced by FA 2020:

  • the loan charge mechanism now only applies to loans made on or after 9 December 2010;
  • the loan charge mechanism will not apply to outstanding loans made in any tax years before 6 April 2016 where a reasonable disclosure of the use of the tax avoidance scheme was made to HM Revenues and Customs (HMRC) and HMRC did not take action;
  • an individual subject to the loan charge can elect to pay their loan balance across three tax years;
  • HMRC will refund "voluntary payments" made to prevent the loan charge arising and included in a settlement agreement since March 2016 for any tax years where the loan charge no longer applies (i.e. before 9 December 2010) or there was reasonable disclosure of a loan made before 6 April 2016 and HMRC did not take action; and
  • there has been additional flexibility over the way payments can be made relating to the level of income a person has (to prevent undue hardship).

It should be noted that the independent review made by Sir Amyas Morse indicated a number of issue concerning the aforementioned changes to the loan charge mechanism. In particular, it was considered that the loan charge was disproportionate in that it went too far back in time to when the legal position was unclear and that stacking years together was too different from how income would normally be taxed.