If you are an employee or contractor who has received remuneration disguised as a loan (disguised remuneration), there is still time to settle up with HM Revenue & Customs (HMRC) before it starts imposing severe loan charges from April 2019.

Tax Partner Paul Morris explains

To recap, employees or contractors who previously received remuneration that was disguised as a loan only had until 30 September 2018 to take action. But HMRC now says that their new penalties can still be avoided provided a settlement is made before next April.

To do this, says HMRC, you should provide it with all the required information, with a tax calculation as soon as possible. The later you leave it, the less chance you will have of reaching a settlement ahead of the new charges.

A five-year instalment plan is available for those individuals with a current income of less than £50,000, and who are no longer engaging in avoidance. These payment terms are only available for those who settle ahead of the new charges.

Those with higher incomes, or those who need a longer period to pay can still agree instalment plans, but they will need to provide more detailed supporting information.

What is disguised remuneration?

Disguised remuneration (“DR”) schemes (typically involving Employee Benefit Trusts (EBTs), Employer-Financed Unapproved Retirement Benefit Schemes (EFURBS) and other third party structures such as umbrella companies) have historically been structured based on tax-free loans being made to an employee or a contractor in lieu of remuneration, with such loans remaining outstanding over the longer-term, or indefinitely.

HMRC has been aggressively targeting such schemes over recent years, but the final ‘nail in the coffin’ is approaching for schemes where such loans remain outstanding on 5 April 2019.

As a result of 2016 Budget measures, on 5 April 2019 all outstanding loans will automatically be ‘deemed’ to be earnings on that date.  The potential tax charge can be over 60%, comprising of up to 45% income tax, 2% employees’ and 13.8% employer’s NIC.

In the majority of cases, the tax and NIC charge will be collected through PAYE from the Employer who was party to the avoidance scheme. Therefore, the Employer has the ‘primary obligation’ to report and account for the liability via the PAYE Real Time Information (RTI) system, and significant penalties can be imposed for non-compliance. Where the charge cannot reasonably be collected from the Employer, provision has been made to allow for the liability to be collected directly from the individual concerned.

Furthermore, under current proposals an Employee who has received a loan will be obliged to provide details of the loan to their Employer by 15th April 2019, and to HMRC by 1 October 2019.  Penalties will apply for failure to meet these reporting obligations.

Time to settle?

With less than a year to go before the DR charges are levied, Employers or users of such schemes should be considering their options and planning accordingly.

In particular, HMRC offers a Disguised Remuneration “Settlement opportunity” where participants or the Employer can settle the liabilities with HMRC to avoid the charges in 2019.

To participate, those wishing to negotiate settlements must provide HMRC with all the necessary information as soon as possible.

Under the terms of the settlement and depending upon the facts of the case, the taxes payable will include income tax, primary and secondary Class 1 NICs, and inheritance tax, together with late payment interest.

HMRC has said it may apply penalties where reasonable care was not taken when filing returns.  Where the Employer settles the employee’s liability, ‘grossing-up’ will be applied in calculating the settlement due.

Why settle?

There are, however, a number of reasons why participants may look to settle before 2019:

  • For Contractors, settlement will be on a ‘net basis’ based on loans or payments actually taken from the scheme, rather than amounts paid by the end client before intermediaries’ costs and expenses
  • Under the Settlement Opportunity, amounts received by way of loans (for years for which HMRC has an assessment in place or is still in time to make an assessment – termed ‘protected’ years) are taxed in the year which they arose, rather than being taxed as one lump sum in April 2019. This allows users to take advantage of lower tax bands in earlier years, and may therefore be advantageous when compared to the April 2019 loan charge.
  • Any beneficial loan tax or NICs (including Employers’ contributions) paid on such benefits can be used to reduce the tax due, where the relevant tax year remains an ‘open’ year or overpayment relief is still available (broadly up to 4 years after the relevant tax year).
  • Where the relevant corporation tax return remains open or capable of amendment, Employers will be able to claim a deduction for the original contribution and fees paid to the promoter for entering into the scheme. For ‘closed years’ where no relief would be available, if a ‘relevant step’ under anti-avoidance rules in Part 7A ITEPA 2003 is triggered in the current year and tax and NICs paid, HMRC may then allow the employer a deduction for corporation tax for the original contribution.
  • Employers will also be able to claim a deduction for corporation tax purposes for any income tax or NICs paid under the settlement. This deduction will be given in the original year of contribution if that remains an ‘open year’, or otherwise the earliest subsequent open year.
  • Where any loans to participants have been accruing interest, if the third party releases or writes-off the outstanding loan balance, a charge on the full amount would apply under Part 7A ITEPA 2003. However, under the settlement opportunity, relief against the Part 7A charge for the accrued interest will be given if the trust is closed or collapsed as part of the settlement arrangement.
  • A settlement will apply only to years for which HMRC has an assessment in place or is still in time to make an assessment (‘protected’ years). However, to protect against any charges arising on 5 April 2019 on any loans relating to years which are not ‘protected’, a voluntary payment must be made (voluntary restitution).
  • Late payment interest is payable in respect of protected years only and HMRC has confirmed that it will not seek interest on payments of tax/NIC for ‘voluntary restitution’ payments.
  • Any amounts paid under an Advance Payment Notice will be treated as payments on account when a settlement is reached.
  • In some instances where HMRC has previously issued a ‘Regulation 80’ determination for PAYE income tax at the basic rate of tax only (based on a BR tax code), no late payment interest will be payable now on settling the higher rate liability.
  • HMRC has confirmed that for those who find it difficult to pay the tax bill, “time to pay” arrangements may be available, subject to income and assets. These will need to be negotiated on an individual basis. This may therefore help to spread the payment liability, rather than it crystallising as one payment in April 2019.

Action point

If you are likely to be impacted by these changes, whether as an Employer or a participant, it is important to ensure that you consider your options as soon as possible.

We have already advised a number of clients in this area. For further information please contact a member of our Business Tax team.

 
 
 

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