A new loan charge announced at Budget 2016 will apply to all disguised remuneration loans outstanding on 5 April 2019.

Disguised remuneration tax avoidance schemes claim to avoid the need to pay income tax and National Insurance Contributions (NICs). They normally involve a loan or other payment from a third-party which is unlikely to ever be repaid.

HMRC says the schemes are used by employers and individuals, and where used by contractors are often known as contractor loans.

HMRC advises users of disguised remuneration schemes that settling now will enable them to agree what they owe and, if required, arranged a payment plan. It may also mean they do not have to pay the new loan charge that is being introduced, and will pay a lower rate of tax on disguised remuneration loans - the loan charge will add all an individual’s loans together and tax them in one year.

They also will be able to settle on the terms available in the guidance, which may not be available if a scheme moves to litigation, which may also produce additional costs.

Anyone who wishes to settle needs to register their interest with HMRC by 31 May 2018, and they or their agent must send all of the required information by 30 September 2018.

Settlement

A contractor or employee settling separately to their employer, needs to supply details of their taxpayer reference, National Insurance number, the amount of contractor loans or contributions made in each tax year, whether they are claiming a benefit in kind offset, and the name of their employer.

Employers need to supply their company name and reference number, their PAYE reference number, the amounts and dates of funds paid into the scheme, details of any corporation tax relief claimed on the contributions to the scheme, and whether they want to claim a benefit in kind offset.

All parties are required to inform HMRC of the date any trust, sub-trust or other entity was created, the amount of the contribution paid into it, and assets held in that trust, other than cash or the loan agreements.

Under the settlement terms, contractors will need to pay income tax on the net amount of all disguised remuneration loans or payments made - this will be calculated using the bands and rates in the years the loans or payments were made.

They will also be required to pay late payment interest for any years where HMRC has an open enquiry into their tax affairs, is within time to open one, or an assessment is in place, as well as NICs, if they are a self-employed contractor, including through partnerships, and any penalties and inheritance tax, depending on circumstances.

The overall amount may be reduced by any income tax paid as a result of declaring a benefit in kind on the basis of receiving a beneficial loan. This is only an option if the relevant tax year is in time to be amended, or for an overpayment relief claim to be made.

Employers will also need to pay income tax and NICs on the amount contributed to or allocated within the scheme, plus late payment interest, and penalties and inheritance tax on the same basis, and can also claim a reduction for any benefit in kind declarations.  They will not have to pay corporation tax on the fee paid to the promoter for entering into the scheme.

Employees who are not a contractor and were paid through a disguised remuneration scheme their employer used, and whose employer has not already settled their tax affairs, will need to pay the same amount of income tax and NICs that their employer would have paid if they were settling their tax affairs.

HMRC’s guidance says it will offer schemes spreading payments over a number of years for those who can demonstrate they will have difficulty paying all the amounts owed at once.

Agents advice

There is more detailed guidance for agents about how settlement terms are calculated. Settlement will be on a net basis - income tax will be applied on all the disguised remuneration loans, rather than the gross amount paid by the contractor. This means that the fees deducted from the gross amount by intermediaries (scheme expenses) will not be taxed as part of income or profits.

Income tax is due for years in which loans were paid, or other payments were made, where HMRC has an assessment in place or is still in time to make an assessment (referred to as ‘protected years’). The tax is calculated at the rates and bands applicable in the year of the loan or payment.

To prevent future disguised remuneration charges (including the loan charge) arising on loans or other payments made from funds paid into the disguised remuneration scheme in years which are not protected, contractors must make a voluntary payment. This voluntary payment (referred to as voluntary restitution) is calculated at the rates and bands applicable in the year the loan or payment was made. Once a contractor enters into an agreement with HMRC to make voluntary restitution, it will become legally enforceable.

Late payment interest is due for protected years. No late payment interest will be payable on voluntary restitution.

The guidance points out that many employers settled all, or part, of their employment income tax and NICs liabilities resulting from their use of a disguised remuneration scheme as part of the employee benefit trust settlement opportunity (EBTSO), which closed in 2015. Many others settled all or part of their liabilities before 1 April 2017 to benefit from the Part 7A relief on investment growth provided for in Paragraph 59 of Schedule 2 to the Finance Act 2011.

Provided that the payment terms of those agreements are met, there will be no further employment income tax or NICs to pay for contributions, or allocations, included in those settlements. This will mean that any Part 7A charge, including the loan charge, will not apply to loans made from those contributions or allocations.

Penalties are based on the additional amount of tax and NICs payable as a result of correcting an inaccuracy identified in the return. Direct remuneration schemes can result in users submitting more than one inaccurate return containing an understatement of tax on, essentially, the same income or earnings.

Where there is more than one inaccurate return and liability to tax relating to the same person and earnings, and the comprehensive double taxation relief rules in Part 7A  apply, HMRC will only charge one inaccuracy penalty.

The guidance for agents also include advice relating to inheritance tax liabilities relating to trusts used as part of disguised remuneration schemes, accrued interest, and capital payments and benefits enjoyed by beneficiaries where investment income has arisen within the trust.

Tax avoidance: disguised remuneration is here.

Disguised remuneration: settling your tax affairs is here.

Disguised remuneration: detailed settlement terms is here.

Report by Pat Sweet