Next month sees a critical milestone in HMRC’s efforts to crack down on Disguised Remuneration (DR)– often referred to as Contractor Loan Schemes.
Those affected have until 30 September to register their interest in a settlement scheme to avoid loan charges, which will otherwise be levied from 5 April 2019.
The subject is one of five topics covered in this month’s podcast by AAT’s Tax expert Brian Palmer. AAT members can listen to all these updates and access handy transcripts here.
Disguised Remuneration schemes explained
In general DR schemes involve the use of loans to reduce the tax that employees or contractors pay on their income.
Typically, an employer makes payments to an offshore third-party, such as an employee benefit trust (EBT). The individual is then paid a small salary – say, up to their personal allowance – and the balance made up with the loan.
The loan is not treated as part of the individual’s taxable income so, other than a benefit-in-kind charge, it is essentially ‘tax-free’. In theory, the loan is never written off or repayable.
HMRC’s loan charge
Legislation was passed in 2011 to tackle disguised remuneration, but it was not fully effective. So last year HMRC ramped up its efforts.
Under the Finance (No 2) Act 2017, HMRC introduced a DR loan charge, payable through PAYE and NIC. This will arise on the 5 April 2019 if a loan has not been repaid on or before that date and a settlement agreed with HMRC.
Time to settle
HMRC is advising DR employers and participants to withdraw from the arrangements and settle their tax affairs before they are issued with a Followers Notice (FN).
FNs force taxpayers to amend their tax returns where they have been involved with a failed tax avoidance arrangement (TAA).
HMRC opened a settlement scheme in November 2017 to encourage those who have used schemes to settle before the loan charge comes in. This settlement opportunity does not offer any special terms, because HMRC is of the view that it has all the “ammunition it needs”.
Those interested in a reaching a settlement with HMRC have until 30 September to apply, otherwise the department warns it might not be possible to reach a settlement before the loan charge arises.
Who is affected?
There will inevitably be a significant number of companies with employees who received loans from an Employee Benefit Trust (EBT), or similar structure. They (the employees) need to consider repaying such loans before April 2019 (or otherwise reach a settlement with HMRC in respect of such an arrangement) to avoid a disguised remuneration charge.
AAT bookkeepers and accountants may find, through no fault or action of their own, they have clients who are exposed to DR schemes. For example, some years ago, a boutique provider of DR schemes may have approached their client(s), directly, or individuals may have received a loan from such a scheme as part of a past employment remuneration package.
Who will be affected?
All parties to involved in the use of a devices, such as EBTs, through which a loan was made, as part of the delivery of a remuneration package, need to consider their position.
Settlements entered into early with HMRC benefit from a transitional rule where investment growth from EBT funds is not subject to PAYE and NIC, however this relief was withdrawn from 1 April 2017.
Time to get things in order
Anyone potentially caught by the legislation will need to take advice and check whether they meet the conditions for providing the information.
The information required will depend on whether the entitiy affected is a contractor, employer or an employee more detail of what is required can be found on GOV.UK
Where possible, individuals should also send their tax calculation for each year and the liability should be agreed and paid (or a payment arrangement put in place) by 5 April 2019.
Brian Palmer’s tax matters podcast offers more further insight into Disguised Remuneration.
David Nunn is Content Manager at AAT.