HMRC Consultation: Tackling Disguised Remuneration

16 August 2016

On 16 March 2016 HMRC published a technical note on Tackling disguised remuneration avoidance schemes, we wrote about this in our article Loans and Disguised Remuneration. This has now been followed up by a consultation document published on 10th August.

We will be responding to this consultation document shortly but in the meantime here is a summary of the timeline and key points, we would strongly encourage all interested parties to formally respond.

Timeline

10 August 2016 - Consultation Document Published
5 October 2016 - Consultation closes
Finance Bill 2017 - Further consultation on draft legislation
Finance Act 2017 - Final legislation

Key Points

  • Will work for Tax and National Insurance (NIC) in the same way.
  • Making Changes to current rules in Part 7A ITEPA 2003 to put beyond doubt that it applies to all forms of Disguised Remuneration (DR) schemes.
  • Arrangements that result in an employee being indebted to a third party will be treated as if the third party made the loan in the first place. Unless third party becomes the employer.
  • New gateway introduced to catch arrangements with close companies that claim payments are not made in connection with employment.
  • If loans to participator rules also catch than rules will make clear which applies to avoid double taxation.
  • The writing off, or release, of a DR loan, including a transfer, results in a tax and NIC charge. Unless post death.
  • Tax relief will be fully denied for employers contributions to DR schemes on or after 6 April 2017.
  • HMRC will pursue the liability from the employer in the first instance, but will transfer the liability to the employee where it cannot reasonably be recovered from the employer. This only applies to Part 7A charges. Three common scenarios this will apply to, Non-UK employer, employer does not have sufficient assets to make the payment, employer dissolved.
  • The Loan Charge - to apply to all outstanding balances at 5 April 2019 that would be caught by Part 7A had they been made at that date. Loans made before 6 April 1999 are not caught.
  • Where a loan has been replaced only the most recent loan is considered so if a pre 1999 loan has been replaced post 1999 it's replacement will be caught.
  • The outstanding balances will be calculated by taking the 'relevant principal' and deducting the 'repayment amounts'.
  • The existing exclusions in Part 7A will also apply to the loan charge.
  • The government has made it clear it will not accept attempts to circumnavigate these changes and the loan charge.
  • 'Relevant Principle' is the initial sum lent under the agreement plus any further amounts added, this could be interest that has been added to the principal.
  • ‘Repayment amount' is only defined from budget day, only repayments of money will be counted. Any amounts written off or released will only be repayment amounts if they have been subjected to tax and NIC.
  • TAAR Included - repayments disallowed where there is a connection with a further avoidance arrangement. This includes circumstances where the money repayment is returned to the individual without an employment income charge.
  • A loan that is transferred from the employer to a third party is called a 'Quasi Loan', the loan charge applies in the same way to both loans and Quasi Loans.
  • Postponement for 'Approved Fixed Term Loans' - provided there is a realistic expectation that the loan will be repaid by its due date. If not repaid the loan charge will apply at the later due date for repayment.
  • Postponement will apply where the loan is a qualifying loan and either (1) the payments condition is met, or (2) the commercial terms condition is met, AND HMRC approve an application for deferment, there will be no right of appeal against HMRC's decision.
  • A qualifying loan is one made before the introduction of Part 7A with a repayment period of less than 10 years where there has been no replacement or variation.
  • The 'qualifying payments’ condition is that there has been a repayment of capital at least once every 53 weeks.
  • The 'commercial terms' condition considers loans that are close to but do not quite meet the requirements of Part 7A, HMRC will consider whether capital  repayments have been made, whether the loan is secured against an asset, whether interest payments have been made, the regularity of repayments (either capital or interest) and the interest rate applied. The terms of the loan will actually need to have been met.
  • Postponement for Accelerated Payments (AP) - A claim will be available to individuals who have paid an AP, but only if the AP was payable by the same person liable to the loan charge, and only where the loan balance is equal to or less than the loan charge. If the AP is later repaid, the loan charge will be payable within 30 days unless the outstanding loan balance is repaid.
  • Interaction with settlements - Generally, where a DR loan hasn't been included in a settlement, and tax hasn't been paid on it, the loan charge will apply. However, if a settlement agreement implicitly covered an earlier year on one or more loans from a DR scheme then the loan charge will not apply.
  • Double taxation - there may be other times a loan charge applies where amounts have already been subjected to tax, there are provisions to protect against this.
  • Interaction with beneficial loans - A benefit in kind arises on loans until a Part 7A charge arises, this will also be the case with the loan charge.
  • NIC - if a Part 7A charge has already been paid on the basis of only tax being due, the NIC will now not be due.
  • AP's - any AP's paid can be used to settle the loan charge, however if that is the case the AP will not be repaid later if the dispute is settled in favour of the scheme user.
  • Similar avoidance schemes - Self employed arrangements that depress the taxable earnings and then return the depressed earnings via a loan or other non taxable amounts will also be legislated for in FB17.
  • The government proposes for self employed arrangements a broad rule without any 'main purpose' tax avoidance test to tackle the continued use of contrived arrangements. The purpose of these proposals is to enable contrived steps to be ignored for tax purposes.
  • A broad set of rules is proposed now but needs to be tightened so as not to catch commercial transactions before being legislated for in FB17.
  • Historic use of self employed arrangements will be tackled by a similar charge to Part 7A but under Part 2 of ITTOIA 2005, imposing a loan charge on any loan balances outstanding at 6 April 2019 in a similar way to that outlined above.

If you are concerned about how this conssultation may affect you then please do not hesitate to get in touch by calling 0203 039 3993.

Loans and Disguised Remuneration

20 May 2016

A significant change in UK tax law has been proposed in a technical note issued by HMRC on 16th March 2016.

Under the proposal any loan or debt outstanding on 5th April 2019 that has arisen from a disguised remuneration scheme will be subjected to tax and national insurance. This will catch loans made at ANY time, even before the disguised remuneration legislation was conceived.

The proposed charge is controversial as it is another attempt by HMRC to introduce retrospective taxation in the UK, something which is against the spirit of Article 7 of the Human Rights Act.

A technical consultation is set for this summer to ensure the legislation is targeted and effective, however the worry is this will not be a genuine consultation.

HMRC’s view is disguised remunerations schemes do not and have never worked. Nevertheless they felt it necessary to introduce the disguised remuneration legislation in 2011 to ‘put it beyond doubt’.

The recent technical note however shows HMRC’s hand has not been as strong as it made out.

At point 12 the note implies that any resultant tax liability from the disguised remuneration is actually that of the employer and therefore further legislation is required prior to the proposed charge on 5th April 2019 to enable the liability to be passed onto the employee.

HMRC has previously given users of such schemes settlement opportunities, which if take up would give them certainty. Under one such settlement opportunity after agreeing the quantum HMRC and the taxpayer entered into a contract agreeing the position, often HMRC would have to concede on a number of tax years as they had not raised enquiries within the statutory time limits.

The proposed charge will hit those that entered into settlement opportunities in good faith with HMRC, although the years that were open to HMRC and for which tax/nic was paid for won’t be charged a second time, the years that HMRC had missed due to the statutory time limits will now fall back into charge.

What loans and debts will be caught and how the quantum will be established remains to be seen.

So far we’ve considered the moral aspects of the changes, but what about the cold hard legal aspects?

One of the highest profile cases in this area is the Murray case. The most recent hearing was in November 2015 where HMRC won. The taxpayer had previously won the first round at the First tier Tribunal. The case is set to be heard for a final time at the Supreme Court towards the end of 2016. The case involved the use of an Employee Benefit Trust and Loans to the payers of Rangers Football Club.

The proposed legislation puts us in a rather odd situation. If, as some expect, the Murray case is successful in the Supreme Court there will be no celebrations. In this eventuality a Judge will have declared the scheme lawful and effective, however a charge will still be imposed on the players on 5th April 2019.

Even if Murray fails many of the schemes HMRC will claim fall within this charge would probably succeed at litigation.

How can a tax and national insurance charge be levied on a past event that was entirely lawful at the time? Sadly HMRC are Judge, Jury and Executioner.

All is not doom and gloom, if you have a loan balance you fear may be caught by the charge in April 2019 please get in touch on 0203 039 3993, once the draft legislation is released and has been analysed we should be in a position to explore your options.

What our clients say about us

“TT Intelligence have been an invaluable source of support to my business. Their attention to detail and professional, efficient manner has been excellent, allowing a seam-free service to my clients. ”

Accountancy Practice Client