Tax Administration

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While the government announced measures to support businesses who struggle to pay their taxes as a result of Coronavirus crisis it is also increasing its efforts to close the tax gap to collect more revenue. These efforts include a Loan Charge review, time to pay arrangements, HMRC’s preferential creditor status, automated notices, plans to tackle avoidance and evasion, targeting offshore income and gains and partnership tax returns.

Dawn Register - Partner and Head of Tax Dispute Resolution
Dawn manages voluntary disclosures and resolves complex tax investigations. She also uses mediation to resolve disputes with HM Revenue & Customs and specialises in UK personal tax and cross border issues.


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Loan Charge review: an update from HMRC

New legislation to be introduced under Finance Act 2020 will provide key changes to the Loan Charge. These changes will apply retrospectively from 5 April 2019:

  • The Loan Charge will only apply to loans made on or after 9 December 2010.
  • The Loan Charge will not apply to loans made between 9 December 2010 and 5 April 2016 where the taxpayer made a reasonable disclosure of the loan on a tax return to HMRC and HMRC did not take action to protect the year (for example, by opening an enquiry or issuing an assessment).
  • A person with an outstanding loan balance on 5 April 2019 can elect to spread the amount of their outstanding loan balance across three years, starting with the year 2018/19. HMRC will refund voluntary payments already made in order to prevent the loan charge arising, including those where a settlement agreement has been reached since March 2016 (subject to specific conditions).
  • Late payment interest will be removed for taxpayers liable to the Loan Charge for the period 1 February 2020 to 30 September 2020. No late payment interest will be due on payments on account for 2019 to 2020 where the payments are made by 31 January 2021.
  • For taxpayers who settled and paid voluntary restitution, HMRC is to set up a scheme under which it may make a refund of a ‘qualifying amount’ paid and associated late payment interest, or waive a qualifying amount due under an agreement. Voluntary restitution will only be refunded in respect of loans made before 9 December 2010 or in respect of a qualifying loan for an unprotected year made prior to 6 April 2016. In the latter instance, a ‘reasonable disclosure’ of the use of the scheme must have been made to HMRC but HMRC failed to take any action. Individuals will need to make a claim for a refund before 1 October 2021.

This legislation is in line with the government’s response to the review by Sir Amyas Morse published in December 2019. Read more about disguised remuneration settlements and the loan charge.

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Time To Pay Arrangements – part of the government’s response to COVID-19

To help support self-employed individuals and businesses in response to the COVID-19 outbreak, the government has announced extra resources to assist those struggling to pay their tax liabilities and in financial distress.

HMRC will be committing 2,000 experienced call handlers to support taxpayers. This includes a dedicated COVID-19 helpline to help those in need. Support will include agreeing a bespoke Time To Pay arrangement with HMRC. This is welcomed, and will help those struggling with cash flow and allow those who enter arrangements to spread liabilities owed over a pre-agreed period.

In addition, HMRC will waive late payment penalties and interest where businesses experience administrative difficulties contacting HMRC or paying taxes, due to COVID-19.

An interest-free Time To Pay Arrangement is unusual; normally ‘forward interest’ applies. However, as always, it will be important to get upfront agreement from HMRC before a payment deadline. There is also a commitment to suspend debt collection proceedings, which again is unusual and to be welcomed in appropriate extenuating circumstances.

See details of the HMRC helpline here.

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HMRC gains preferential creditor status from 1 December 2020

Under the Finance Act 2020, HMRC will regain its status as a secondary preferential creditor for insolvencies that commence on or after 1 December 2020. This means that in an administration or liquidation, HMRC will move up the rankings of who gets paid out first, jumping ahead of floating charge and unsecured creditors.

This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee NICs, and Construction Industry Scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer NICs.

The legislation does not include a cap on the age of tax debts which can have preferential status.

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HMRC changes the rules so automatic published notices are valid

New legislation to be introduced in Finance Act 2020 will confirm that HMRC’s use of large-scale automated processes “is and always has been fully supported by legislation”. The provisions affected include the giving of notice to file a tax return as well as the automatic issuing of penalties where returns are filed late.

In the past, taxpayers have challenged the use of automated processes. Tribunal Judges have cancelled penalties in some cases where HMRC is unable to show that a specific HMRC officer considered the case individually and validated a notice. The purpose of the legislation is to safeguard revenue charged since automated processes were introduced by HMRC. This means the legislation applies retrospectively and in the future.

Any taxpayers who have received a settled judgement from a Court or Tribunal regarding the use of automation by HMRC before the date of this announcement (31 October 2019) will not be subject to the retrospective application of this legislation.

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Action to tackle tax avoidance and evasion to raise an additional £4.7 billion

From April 2021, large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge – read more. The government will consult shortly on the detail of the notification process. The government estimates that this will bring in an additional £160m across the next four years.

The government announces a set of targeted measures to ensure that businesses pay the tax they owe, under the banner of ‘fairness’. This includes measures to crack down on tax abuse in the construction industry, and illicit tobacco, as well as measures to tackle the promoters of tax avoidance schemes.

To tackle the hidden economy there is legislation to make the renewal of licences to drive taxis and private hire vehicles, operate PHV firms, and deal in scrap metal conditional on applicants completing checks that confirm they are appropriately registered for tax. The objective is to make it more difficult for non-compliant traders to operate.

The government is investing in additional compliance officers and new technology for HMRC.

The combined impact of these measures is part of the government’s ongoing agenda to raise money by reducing the tax gap (estimated to be £35bn in the latest HMRC annual report).

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HMRC sends further ‘nudge’ letters targeting offshore income and gains

HMRC continues to send out ‘nudge letters’ informing individuals that HMRC may have knowledge that they are in receipt of offshore income and gains. HMRC is following up on data exchanged internationally which is received under the OECD’s Common Reporting Standard (CRS).

The letter places the onus on the taxpayer to establish if any voluntary disclosure or clarification is required in relation to their overseas interests. The letter applies to all tax years and for any size of mistake.

If you receive one of these letters and need to make a voluntary disclosure, please seek expert advice regarding the specific circumstances. You can read further information, or support on the disclosure of foreign income and gains here.

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Partnership tax returns

A Limited Liability Partnership (LLP) is a body corporate in Iaw but generally treated as a partnership for tax purposes under specific deeming provisions. The First Tier Tribunal (FTT) tax case of Inverclyde and another v HMRC highlighted that it was unclear whether these deeming provisions applied for tax administration purposes, including those which relate to HMRC’s power to require tax returns, open enquiries and to make amendments. In the Inverclyde case, the FTT found that the deeming provisions did not apply for these purposes, so an LLP should be treated as a company. Therefore, it was decided that HMRC had opened and closed their enquiries incorrectly, as it had used the provisions which apply for partnerships, rather those which apply for companies.

The Government has announced that it will introduce legislation in Finance Bill 2020 with retrospective and prospective effect to confirm that LLPs are to be treated as partnerships for tax administration purposes. Although draft legislation is yet to be published, it is envisaged that this will reverse the decision in the Inverclyde case. Most LLPs will be unaffected, as it has generally been accepted by LLP businesses and their advisers that LLPs are to be treated as partnerships for tax administration purposes, and will have filed partnership tax returns accordingly.

If you think the changes will affect you, please get in touch with your usual BDO contact to discuss.

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