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Disguised Remuneration / EBT

Disguised Remuneration Disclosure Facility

This page is being regularly updated with the latest developments concerning the Loan Charge Scheme. Please see the latest updates below in chronological order, starting with the most recent developments.

January 2020 Update:

Loan Charge – The Morse report or are some recommendations Morse code for future anomalies

The Morse report recommends that all loans taken before 9 December 2010 will not be subject to the Loan Charge.  Also, loans taken out between 9 December 2016 will not be subject to the Loan Charge provided a reasonable disclosure of the arrangements has been made to HMRC for the relevant tax year(s).

This was intended to mean that unless HMRC has protected its position for any of the relevant tax years, any loans taken in unprotected years would not be chargeable to the Loan Charge nor would HMRC be able to recover the pre-existing PAYE/NIC liability because they are out of time to do so.

This is fine for taxpayers who did not receive their loans from a Trust. They will have no further liability in relation to unprotected tax years.  However, for those who received loans from a Trust and who have:

  1. Repaid the loan in order to avoid the Loan Charge and a further loan is made or,
  2. Now wish to have the loan written off or waived and the Trust wound up or,
  3. The original loan is extended beyond the original repayment term.

Under existing legislation there will or (in the case of 3) could be a liability under Part 7A IPEPA 2003.  This means there is no finality for taxpayers if a Trust made the loan and years are unprotected.

HMRC was writing to taxpayers (not their agents) before April 2019 giving them the option of either repaying the loans that would otherwise become subject to the Loan Charge or settling the earlier years.  There was no mention that additional liabilities would arise in the circumstances described above.  To that extent the letters were disingenuous.

HMRC might argue they did not know, at the time, they would not be able to collect tax for unprotected years but during the settlement process taxpayers were given the option not to settle unprotected years which means HMRC should have been aware of the prospect of future liabilities.

It therefore seems anomalous that PAYE/NIC charges could arise for amounts in excess of the original liability (because of increases in tax and NIC rates) for those taxpayers who now find themselves trapped in this position which is against the spirit of the Morse recommendations.

HMRC should include in the new legislation an exemption from future charges for those taxpayers affected.

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.

2019

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.

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