The government has cracked down on disguised renumeration schemes designed to avoid tax and NI bills, leaving those who took part with potentially huge bills to pay
This article was first published in the February 2018 UK edition of Accounting and Business magazine.
Time and sympathy are running out for those who have benefited from a particular payment scheme set up to avoid large tax bills. But if they don’t get a move on and declare their position, they could be faced with even larger tax bills or the distinct possibility of bankruptcy.
It is a situation that is proving to be a real headache for the legions of contractors who entered into schemes that set up loans from employee benefit trusts to circumvent PAYE and national insurance (NI) payments. Web forums are awash with debate on contractor websites. Many are finding the new rules very difficult to understand; those that do understand them fear they may not be able to afford their tax liabilities. Some believe they may lose their family homes or worse.
However, loans taken out from employee benefit trusts (EBTs) have been in the government’s tax avoidance sights for some time now. And the deadline to provide HMRC with details of disguised remuneration loans paid to self-employed contractors is not until 1 October 2019, which should give all those involved plenty of time to review their particular situations and make payments if required.
That said, there have been regular updates from the government, with additional consultations and legislation to tackle particular situations, so it is perhaps not surprising there is still a level of confusion. For instance, the autumn Budget last November revealed the results of consultation on how close companies have been used to facilitate this form of disguised remuneration.
But the majority of changes, which were announced in the 2016 Budget, have now been enacted, including a new charge on loans made after 5 April 1999 through disguised remuneration schemes that remain outstanding on 5 April 2019. In the 2017 autumn Budget, the government said it would legislate in the Finance Bill 2017-18 to ‘put beyond doubt… that Part 7A of Income Tax (Earnings and Pensions) Act 2003 applies regardless of whether contributions to disguised remuneration avoidance schemes should previously have been taxed as employment income’.
This latest Budget also confirmed that the government would legislate to ensure that the liabilities arising from the loan charge are collected from the ‘appropriate person’ where the employer is located offshore. So, it is clear that the government has no intention of letting up on these schemes, no matter how they were set up.
There are some big numbers behind the moves. The government anticipates that between 2018 and 2020, the legislation will bring in an additional £1.88bn in tax receipts. It is also anticipated that the legislation will hit up to 40,000 individuals who have entered into disguised remuneration schemes, together with up to 10,000 self-employed individuals.
And bluntly, the government has revealed that ‘some of these individuals will be unable to repay the loans, agree a settlement with HMRC before 5 April 2019, or pay the loan charge arising on 5 April 2019’. The government anticipates that some of these individuals will become insolvent as a result.
‘There has been a lot of debate and discussion about how unfair this is going to be, but individuals were basically trying to do something that, out and out, would avoid paying tax,’ says Chas Roy-Chowdhury, head of tax at ACCA. ‘I think it is quite right that we have a cut-off date in 2019 when the loans have to be repaid, and I think that if people need to sell their houses and other assets then they will have to do that.’
This may seem like a harsh attitude, especially as many will have entered these schemes many years ago in good faith, but the reality is that, as Roy-Chowdhury observes, people may not have been able to afford these assets, such as the family home, if they had been paying PAYE and NI contributions on their income in the first place.
‘The rest of us have had to buy our homes after paying these taxes,’ says Roy-Chowdhury.
‘If they have been badly advised, they should take action against those that advised them,’ he suggests. ‘It is often the case in tax that if something seems too good to be true, then usually it is. This is one of those situations of having your cake and eating it.’
There is a risk, though, that many individuals are not aware that they are caught by the legislation. They may have taken out loans many years ago, changed their roles and taken on employed positions with a much more conventional payment structure – or even retired, as the legislation can retrospectively look at loans taken out from 1999, nearly two decades ago.
Roy-Chowdhury urges those affected to talk to HMRC as soon as possible to schedule a repayment or settlement, rather than waiting until the deadline in 2019.
Disguised remuneration avoidance schemes are used by employers and individuals to avoid income tax and NI contributions. Although there are various types, they normally result in a loan from a third party on such terms that mean it is unlikely to ever be repaid.
To prevent attempts to exploit the new loan charge announced in the 2016 Budget, a targeted anti-avoidance rule would ensure further avoidance schemes don’t work.
HMRC warned back in August 2017 that attempts to avoid the new legislation would fail. It said then that scheme users were being told that they could sign documents saying the sums they had received from their scheme were not loans at all, and therefore would not fall under the loan charge legislation. But as HMRC said at the time: ‘Renaming something now doesn’t change what happened in the past. Attempting to describe a loan as something else doesn’t mean it’s not a loan.’
In short, the only way to avoid the new loan charge is by making a genuine repayment of the loan balance or settling the tax liability with HMRC in advance. Any repayments connected to a new tax avoidance arrangement will be ignored and the loan charge will still apply.
Philip Smith, journalist
"It is often the case in tax that if something seems too good to be true, then usually it is. This is a situation of having your cake and eating it"