Posted by Paul Morris on October 18, 2018
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.
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.
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.
There are, however, a number of reasons why participants may look to settle before 2019:
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.