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Disguised Remuneration / EBT

Disguised Remuneration Disclosure Facility


They think it's all over - it's not now.

Unlike the famous football World Cup comment in which the game was sealed with a late winning goal, HMRC has found a way of removing the goalposts completely to recover additional taxes and NIC going back as far as 1999.

For several years now HMRC has been targeting taxpayers who have been involved in avoidance schemes under which a small salary is paid and declared with the significant balance paid in the form of untaxed loans. Many taxpayers opted to settle their liabilities on the basis the loans would be treated as taxable but only for those years for which HMRC was in time to recover the duties due, the protected years. The years where HMRC was out of time, the unprotected years, HMRC took no further recovery action.

New rules were introduced and finalised in the Finance Act No2 FA2017 whereby all loans remaining untaxed would be at 5 April 2019 taxed as if they were income of the taxpayer in the tax year 2018/2019. This would include a charge for those years for which HMRC has not protected its position.

The new tax charge will apply to a loan (or loan transfer arrangement) where:

  • If it had been made on 5 April 2019 it would have fallen within the disguised remuneration rules (including the Finance Bill 2016 and 2017 changes);
  • It was made on or after 6 April 1999; and the loan, or part of it, is still outstanding at 5 April 2019

The charge will not apply if by 5 April 2019:

  • The loan is repaid in full;
  • The loan is from an amount on which income tax has been accounted for in full (including under settlement with HMRC); or
  • The loan has been taxed in full under the disguised remuneration rules, or
  • If any exclusions apply.

Many clients settled their dispute with HMRC by agreeing to pay the duties due for the protected years. However, the new rules, not envisaged at the time of settlement, mean the only way to avoid the new loan charge is to pay the tax due for the unprotected years as well. This can be achieved through a voluntary settlement with HMRC, see paragraph 2.1 of this link: Disguised remuneration: detailed settlement terms

The deadline for registering an interest in settling with HMRC was 31 May 2018 followed by the provision of relevant information soon after. A failure to register means the loan charge will kick in.

There may also be IHT issues to consider particularly if a trust was involved such as in an EBT arrangement.

Some clients may need to negotiate a time to pay arrangement in view of this unexpected additional liability.

December 2019 Update:

Special Bulletin re Amyas Morse Report into HMRC Loan Charge legislation and practice.

The long awaited Report was made available to the public last week. The Report has not been approved by Parliament and legislative charges needed will not become law until Summer 2020.

The report asks for an immediate response to the following: 

  1. Government should come forward urgently with a clear timetable for its response to this report and for any necessary legislation to give effect to these recommendations to provide taxpayers with certainty ahead of the 31st January 2020 deadline for assessment to the Loan Charge. This should include appropriate guidance from HMRC to those likely to be affected, and a means of ensuring that taxpayers have time to take appropriate advice before submitting their Self Assessment return or – for those who remain in the settlement process – whether to settle rather than pay the Loan Charge.
  2. the Review recommends that HMRC run a settlement opportunity in 2020, to allow any taxpayers outside the scope of the Loan Charge but with a liability arising from loan schemes to settle their tax affairs. The report was critical of the Loan Charge looking back 20 years and recommended the following changes:
  3. The Loan Charge should not apply to loans entered into before 9th December 2010.
  4. Unprotected Years arising from loans entered into on or after 9th December 2010, where the relevant taxpayer made reasonable disclosure of their scheme usage to HMRC and HMRC did not open an investigation, should be out of scope of the Loan Charge(subject to recommendation 5 below). Other Unprotected Years should remain in scope of the Loan Charge. This will ensure that taxpayers do not benefit from failing to disclose their tax affairs to HMRC. The approach to defining“reasonable disclosure” should build upon HMRC’s ordinary compliance approach in considering the extent to which a Self Assessment return is sufficiently clear about the usage of a loan scheme
  5. Any Unprotected Years arising from loan schemes entered into during the 2016-17,2017-18 and 2018-19 tax years should all be included in the scope of the Loan Charge, to ensure that taxpayers who entered into loan schemes after the Loan Charge was announced do not unreasonably benefit from HMRC having ceased protecting years following the announcement
  6. HMRC should refund the Voluntary Restitution elements of settlements made since 2016 that were paid to settle Unprotected Years when the relevant loans were entered into: a) prior to 9th December 2010; or b) between 9th December 2010 and the start of the 2016-17 tax year, where the scheme user made reasonable disclosure of their scheme usage in their tax return
  7. Taxpayers should be entitled to opt to spread their outstanding loan balances over three years, to mitigate the impact of taxpayers paying tax at a higher rate than they ordinarily would. This reduces the effect of stacking their outstanding loan balances into a single year, which artificially created an increased exposure to a higher rate of income tax
  8. The extent to which the Loan Charge looks back to activity in earlier tax years dating back to 1999-2000, and the manner in which ongoing interest is charged on payment arrangements has given rise to concerns over how policy on interest is applied within the tax system. The government should review future policy on interest rates within the tax system and report the results to Parliament by 31st July 2020

The Report was critical of the approach of HMRC and its attitude towards the hardship caused by the backdating of the Loan Charge to 20 years.  HMRC must repay duties already settled particularly (but not limited to) those cases involving payment of voluntary restitution arising from loans entered into before 9 December 2010.  Typically, HMRC is ignoring these concerns and will not make any repayments until the new legislation becomes law, a wait of 6 months or more for those taxpayers who could ill afford to have made the payments in the first place.

Gilbert Tax will review each settlement already entered into on behalf of its clients and also the impact on those clients who have not yet settled. We will contact each client affected within the next dew weeks to discuss the impact and the likely outcome for them.

In the meantime, if you have any queries, contact John Poskitt on 07825 811980.  He will note your concerns and arrange for a call back by our technical specialist.

We are aware many people have not engaged in the settlement process and may therefore be liable to the Loan Charge.  A relaxation of the payment rules should mean liability can be reduced by spreading over 3 years.  If you are affected please also contact John Poskitt and leave your details for a call back.

September 2019 Update:

Ex NAO chief to lead independent review of loan charge

The former head of the National Audit Office (NAO), Sir Amyas Morse, will head up the independent review into the controversial loan charge and is set to report by mid-November.

Following sustained criticism of the loan charge rules, effective from 5 April 2019, to claw back income tax and national insurance contributions (NICs) from contractors paid in the form of loans or quasi loans, known as disguised remuneration, the government was forced to announce an independent review.  The review will consider whether or not the Loan Charge was the right way to deal with individuals’ use of the disputed tax avoidance schemes and also whether changes announced by the government address legitimate concerns about the impact on individuals, including affordability for those affected.

While the review is under way the loan charge remains in force.

HMRC has issued a notice confirming that ‘if you are not settling your disguised remuneration scheme use, you will still need to complete an additional information return by 30 September 2019. If you fail to do so HMRC reserves the right to charge penalties.

The review will focus on the impact on those individuals who were using the schemes directly, and whether the loan charge policy is an appropriate way of dealing with disguised remuneration loan schemes.  This reflects main concerns raised by MPs and campaigners about the loan charge.

The disguised remuneration loan charge was introduced in 2016 to tackle contrived schemes where a person’s income was paid as a loan which did not have to be repaid.  That gave users three years to either repay the loan, settle the tax due with HMRC, or face an income tax charge in one tax year on the total amount of outstanding loans.

Around 40,000 people are affected by the loan charge, although some taxpayers have settled with HMRC during the three-year settlement agreement period.

It's very important for those subject to the loan charge to follow the published advice which means those who have already settled should do nothing and those who have settled and are paying by instalments should continue to do so.  Those who have provided all the required information by 5 April 2019 and are waiting to finalise a settlement can continue to do so if they wish.

However, HMRC has indicated that they may wish to wait for the Government's response to the review before settling.

The review will conclude by mid-November to give taxpayers certainty ahead of the 31 January 2020 self-assessment deadline.  Financial Secretary to the Treasury Jesse Norman said: ‘These disguised remuneration schemes are highly contrived attempts to avoid tax, but it is right to consider if the loan charge is the appropriate way of tackling them.  The Government fully appreciates the concerns expressed by individuals, campaigners, and MPs who have raised concerns about the loan charge.  Sir Amyas is known and respected across parliament for his expertise and independence of mind. The government looks forward to his report as it continues to tackle these and other tax avoidance schemes.

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Client Story

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Tax Investigation Specialist
Scott Gilbert, Partner

"We understand that people sometimes make mistakes in their dealings with HMRC and that HMRC make mistakes in dealing with taxpayers. Many people do not know how to deal with HMRC or who to turn to for help resolve the tax dispute.

Our firm of tax advisors specialise in resolving people's problems with HMRC. We have extensive expertise in dealing with all forms of tax investigations and tax disputes as well as with taking matters to the Tax Tribunal where agreement cannot be reached.

We deal both directly with the individual who is under enquiry and also work with many firms of accountants supporting them in dealing with HMRC disputes and advising them on how to handle HRMC to get the best result.

The fact is that proper management of HMRC is the best way of reducing the tax, interest and penalty as well as the time taken in resolving any tax dispute.

Our expert team are none judgemental and rigorously defend your position within the scope and parameter of the law. We take control and manage the process to minimise the interruptions that any form of tax investigation causes to an individual's life and business."

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