How to calculate your settlement value

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You will need to find or estimate to the best of your ability the following and perform the calculation.

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·      The quantum of untaxed payments received in the loan charge period (9/12/10 to 5/4/19).

·      Add 20% to the above value for “fees”.

·      Add the total of the above to your 2018/19 income

·      This is your gross taxable income

·      Apply any tax reliefs remembering that any taxable income over £100k will reduce your personal allowance by £1 for every £2 over £100k

·      This is your net taxable income

·      Apply the tax rate bands (20% on the first £34,500; 40% on £115,500; 45% on everything else)

·      This is your tax liability – the “loan charge”

·      Add interest on unpaid tax from 30/9/20 to26/11/25 (circa 27%)

·      Deduct £70,000

·      This is your loan charge liability – Figure A

Then

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·      Calculate your revised tax position for each year in which an untaxed payment was received remembering to use the amount of money received plus 20%

·      Calculate the NIC due in each year

·      Apply a discount to the total tax/NIC value

·      The discount is 10% of the first £50,000 of scheme income plus 5% of the next £100,000 of scheme income. Max in any one year if £10,000

·      Scheme income is the salary/smaller part of thepayments, plus the larger untaxed amount plus the 20% “fees” addition

·      Aggregate the liabilities for all years

·      Deduct a further £5,000 from the liability

·      This is your discounted liability – Figure B

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Your settlement value is the HIGHER of A or B.

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Do you need a time to pay agreement?

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·      If so, take your settlement value above.

·      Calculate 8.75% of the settlement value

·      Multiple the above number by 2.5

·      This is the total forward interest.

·      Add the settlement value and the forward interest

·      Divide the total by 60 to arrive at the monthly payment to be made under a time to pay arrangement.

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Will you be accepted for time to pay?

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·      Calculate your monthly income now.

·      Deduct monthly expenses

·      Divide the balance (if positive) by 2

·      This is the maximum monthly instalment HMRC will consider is affordable

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If the monthly TTP payment from the above is less than the above calculation, you can use a time to pay.

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If the monthly TTP payment from the above is more than the above calculation, you are likely to be refused a time to pay agreement.

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If you can make an initial payment into a TTP, this will reduce the forward interest and perhaps bring it within the affordability criteria.

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When will we know if the above is correct?

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The detail of the calculation will be contained in secondary legislation which HMRC claim will be ready in May.

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Single most important outstanding issue?

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There are many issues stemming from the above which are under active discussion – which does not mean that HMRC will necessarily adjust their calculations to include them – details of which will be in subsequent posts.

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The calculation however does NOT include situations in which a contractor wholly owned company (a PSC) is part of a scheme. Here HMRC regard the PSC as an “employer” liable to have made PAYE deductions.

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The “discounts” are said to apply here but to date there is no indication of exactly how these will be applied and how the resulting calculation will be reflected in the personal liability of the owner – the contractor. This is unlikely to be known for perhaps a month at least.

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