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.

2016 Budget

17 March 2016

Following a more detailed review of the documentation on Budget Day these are a few of the more interesting developments in more detail.

Reform of the intermediaries legislation for public sector engagements

From April 2017, and following further consultation, the intermediaries legislation (IR35) will be extended such that all public sector bodies must ensure that any worker engaged via a Personal Service Company (PSC) is compliant with the legislation otherwise they must account for tax and national insurance on any payments made.

Currently it is the responsibility of the PSC to decide if it is caught by IR35 or not, the proposed change shifts the responsibility to the engaging body. If there are more intermediaries in the supply chain such as an agency then the entity closest to the PSC in the supply chain will be responsible.

HMRC have said they will provide assistance for public sector employers and agencies by introducing clear, objective tests for employers at the point of hire. For more complex cases where the result is not clear cut new tools will be designed to enable the engager to obtain a real-time HMRC view.

PSC's that provide their services outside of the public sector are unaffected by these changes, however the new tools will also be made available to them to assist them in their compliance with the rules.

The new Lifetime ISA

The possibility of a new Pension ISA had been suggested by commentators, the Chancellor has taken the idea a step further with the Lifetime ISA.

The Chancellor stated that often young people are faced with a difficult choice, either save for a deposit to buy their first home, or save for their retirement. The Lifetime ISA effectively enables young people to do both at the same time.

From 6th April 2017 those under 40 will be able to save up to £4,000 into the Lifetime ISA each year and receive an additional 25% bonus from the government. This bonus is the equivalent to receiving basic rate tax relief on the investment.

Savings along with the government bonus will be available in retirement or to assist in buying a first home.

If funds are withdrawn at any other time then the government bonus and any investment growth must be returned to the government along with what is described as a 'small' 5% charge.

Savers can continue to make investments and receive the government bonus up to the age of 50.

Funds can be drawn to assist in the purchase of a new house 12 months after the account has been opened and from the age of 60 for use in retirement.

Corporation Tax losses

Currently there are complex loss relief rules for companies that generally allow losses carried forward only to be set against the same income stream.

From 1 April 2017 losses arising that can’t be utilised in the current period can be carried forward and used against profits from other income streams or from other group company’s income streams.

A restriction will apply such that only 50% of the profits in excess of £5 Mil will be relievable but this will only affect the largest 1% of companies.

Loans to Participators 

Currently when a participator becomes indebted to a company the company must account for tax at a rate of 25% of the balance owing at the year end unless the loan has been repaid within 9 months of the year end. The tax will be repaid to the company on the normal tax payment date for the accounting period in which the balance is repaid.

There are complex anti avoidance rules regarding repayment.

The new rules will apply to any indebtedness that arises on or after 6 April 2016, current balances will NOT attract the increased charge.
 

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

Disclosure of Tax Avoidance Schemes (DOTAS)

20 January 2016

Disclosure of Tax Avoidance Schemes (DOTAS) – FACTSHEET

Introduction

The DOTAS rules were introduced by HM Revenue & Customs (HMRC) in 2004 with the objectives of obtaining early information about tax arrangements, how they worked, and who was using them.

The disclosure of an arrangement has no effect of the tax position of the person using it, however it gives HMRC the opportunity, through parliament, to render it ineffective, possibly in a retrospective manner.

The rules give HMRC information powers and the power to implement penalties for failure to comply with the rules.

There are a number of important definitions within the rules:

Promotor – someone who in the course of providing taxation services:

Is responsible to any extend for the design of a scheme;
Makes a firm approach to another person making the scheme available to them for their use;
Makes the scheme available to others;
Organises or manages the implementation of the scheme.

Introducer – someone who makes a marketing contact, simply introduces the scheme to another, and puts them in touch with the Promotor.

Scheme Designer – someone who is only involved in the design of the scheme and does not themselves make it available to others, or organise or manage its implementation. This is however subject to three tests:

The Benign Test;
The Non-advisor Test; and
The Ignorance Test.

Scheme organiser and managers – someone who organises and manages a scheme but did not design it or make it available to others when they are not connected with the person who marketed or designed it or similar schemes – if there is a connection they will be a Co-Promotor.

Notifiable scheme – a scheme that meets certain Hallmarks (see below)

Client – a use of a notifiable scheme

The DOTAS rules have been updated a number of times over the years and their scope has been widened. Both the taxes covered and the hallmarks have been extended.

Three key questions which will be covered further below are:

Is a scheme required to be disclosed?
Who has the obligation to disclose, and by when?
What are the consequences of failing to comply with or breaching the rules?

Is a scheme required to be disclosed?

Disclosure covers certain tax arrangements relating to the following taxes:

Income Tax (IT), Corporation Tax (CT), and Capital Gains Tax (CGT)
National Insurance Contributions (NIC)
Stamp Duty Land tax (SDLT)
Annual Tax on Enveloped Dwellings (ATED)
Inheritance Tax (IHT)

The different taxes have different rules and different hallmarks.

Guidance on the rules for disclosing arrangements relating to VAT are not part of the DOTAS rules and can be found in Vat Notice 700/8 Disclosure Of Vat Avoidance Schemes.

Income Tax (IT), Corporation Tax (CT), and Capital Gains Tax (CGT)

A tax arrangement should be disclosed if:

It will, or may be expected to enable a person to obtain a tax advantage;
The tax advantage is the main benefit or one of the main benefits of the arrangement;
It is a hallmarked scheme, that is it falls within any of the hallmarks in the relevant regulations.

The relevant Hallmarks are:

1(a) – Confidentiality from other promotors
1(b) – Confidentiality from HMRC
3 – Premium fee
5 – Standardised Tax Products
6 – Loss Schemes
7 – Leasing Arrangements
9 – Employment Income

A deeper explanation of the hallmarks is not within the scope of this factsheet.

National Insurance Contributions (NIC)

As for IT, CT and CGT with the exception of Hallmarks 6 and 7.

Stamp Duty Land tax (SDLT)

The hallmarks do not apply to SDLT. An SDLT arrangement should be disclosed if meets certain tests:

Test 1 – are there arrangements that enable an SDLT advantage?
Test 2 – Is the advantage a main benefit of the arrangements?
Test 3 – Grandfathering – an exemption for arrangements designed before 1 April 2010, there are exceptions the exemption.
Tests 4 to 7 – Steps A to F – no disclosure is required for a scheme that comprises one or more of the six steps. However Tests 5, 6, and 7 place restrictions on the application of the steps.

Step A – Acquisition of a chargeable interest by special purpose vehicle (SPV)
Step B – Claims to Relief
Step C – Sale of shares in SPV
Step D – Not exercising election to waive exemption from VAT
Step E – Transfer of a business as a going concern
Step F – Undertaking a joint venture

Annual Tax on Enveloped Dwellings (ATED)

The hallmarks do not apply to ATED. The disclosure rules for other taxes may however apply. An ATED scheme must be disclosed if it meets certain tests:

Test 1 – Are there arrangements to enable an ATED advantage to be obtained?
Test 2 – Is the tax advantage a main benefit of the arrangement?
Test 3 – Does the arrangement fall within one of the prescribed descriptions?

The prescribed descriptions can be found in the legislation and are not within the scope of this factsheet.

There are a number of important exclusions which exempt a scheme from disclosure, these are:

Exclusion 1 – the transfer is on such terms would reasonably be expected to be agreed between unconnected persons.
Exclusion 2 – the transferor and transferee are members of the same group of companies and the transferee meets the ownership condition.
Exclusion 3 – The transfer constitutes a distribution out of the assets of the transferor, and the transferee is an individual, a corporate sole, a trustee or persona who meets the ownership condition.
Exclusion 4 – The transfer constitutes a settlement.

Generally the ATED DOTAS rules apply from 4th November 2013.

Inheritance Tax (IHT)

The Hallmarks do not apply to IHT. An IHT scheme must be disclosed if it meets certain tests:

Test 1 – Are there arrangements or proposals for arrangements that result in property becoming “relevant property”?
Test 2 – Are those arrangements or proposals for arrangements such that they enable a “relevant property entry charge” advantage?
Test 3 – Is the tax advantage a main benefit of the arrangements?
Test 4 – Grandfathering – exempting from disclosure arrangements that were in place before 6th April 2011.

There are a list of 19 grandfathered arrangements, details of these can be found in HMRC’s DOTAS guidance.

Who has the obligation to disclose and by when?

Generally the scheme promotor has the obligation to disclose, however in certain circumstances, for example where the promotor is offshore, or a scheme was devised “in house” then it is the user that must make the disclosure.

When a promotor is required to disclose he must do so within 5 days (starting the day after) of:

Making a firm approach to another person making a scheme available to them; or
Makes a scheme available for implementation by another person; or
Becomes aware of a transaction forming part of the scheme.

The five days does not include non-working days such as weekends or bank holidays.

Disclosure can be made online, further details can be found in HMRC’s guidance.

Once disclosure has been made, if appropriate HMRC will issue a Scheme Reference Number (SRN) which must be included on the tax return of any client that uses the arrangement.

A promotor must issue a client with an SRN within 30 days of either receiving it from HMRC or from the client entering into a transaction within the scheme.

If a promotor issues a client with an SRN then within 10 days the client must notify the promotor of their National Insurance number (NINO) and Unique Taxpayer Reference (UTR).

From 1st January 2011 promotors are also required to provide lists of clients that they have issued an SRN to, these lists must be provided every quarter for clients issued with an SRN within that quarter.

There are slightly different rules for disclosable schemes relating to ATED, SDLT and IHT.

What are the consequences of failing to comply with or breaching the rules?

HMRC may impose penalties for non-compliance with the DOTAS rules, broadly these penalties fall into three categories:

Disclosure Penalties – for failing to disclose a scheme.
Information Penalties – all other failures except those covered by the next point.
User Penalties – for failure by a user to notify HMRC of a SRN they have been issued with.

For disclosure penalties an initial penalty will be determined by a tribunal, a further penalty may apply for continued non-compliance.

In all other cases (except for user penalties) HMRC will apply to a tribunal to impose a penalty, applications will be subject to a hearing where each party can state their case.

Each case will be looked at carefully based on the facts and will only be taken where there is not a reasonable excuse for the failure. In all cases the individual circumstances will be taken into consideration when deciding whether to impose a penalty.

There is a right of appeal against any penalty imposed.

Disclosure penalties – An initial penalty of up to £600 per day for an initial period starting with the failure and ending with the date the tribunal determines the penalty.

If the tribunal determines this penalty does not create a sufficient deterrent then it may increase the penalty to a maximum of £1,000,000.

HMRC may then impose a further penalty of up to £600 per day if the failure continues.

Information Penalties – a tribunal may determine an initial penalty not exceeding £5,000 for each failure.

HMRC may then impose a daily penalty of up to £600 per day for each day the failure continues. In certain prescribed cases this can be increased to £5,000 per day.

User Penalties – a user who fails to report an SRN is liable to a penalty of £100 for a first occasion, this rises to £500 if a failure on a second occasion is within 3 years of the first occasion, and £1,000 on a failure on the third occasion.

These penalties are imposed by HMRC and do not need tribunal approval.

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

HMRC wins Rangers Tax Case Appeal

05 November 2015

Yesterday the Opinion of the Court was issued in respect of the latest appeal to the Court of Session by HMRC in the Murray Group Holdings Ltd Case.

To the surprise of many HMRC have won this round although it is almost certain the former Ranger’s chairman Sir David Murray will take the case onto the final appeal arbiter, the Supreme Court. This case has been ongoing since 2010 and many refer to it as the Big Tax case in respect of arrangements that used Employment Benefit Trusts (EBTs).

HMRC’s win hinges on the redirection of earnings principle, in the wording of the opinion ‘… if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. That accords with common sense.’.  

A key factor in the case was that the arrangement’s documentation included a contract of employment and a side letter providing for a discretionary trust payment. The trust would subsequently set up a sub trust in the name of the employee which would in turn loan the money onto the employee. The court decided the payment to the trust formed part of the employee’s employment package and as such there was an obligation to deduct tax under the PAYE legislation which falls upon the employer.

A number of other key cases in the EBT arena were considered, including Dextra Accessories Ltd and Sempra Metals Ltd which both went in the taxpayers favour. Dextra was considered to not be relevant due to distinguishing facts and the court decided re Sempra that the decision should simply not be followed.

HMRC have made it clear that they see this a paving the way for Accelerated Payment Notices (APN’s) to be issued for similar cases using EBTs, however due to the likely appeal this may be beyond their powers, until the final appeal is heard and published we remain uncertain as to the final outcome.

The full text of the opinion can be accessed here.

TT Intelligence is a young, dynamic firm who embrace the idea that detailed information is key to making the right decisions about your tax affairs. Our consultants have been working in the tax and accounts industry for over 20 years, their extensive knowledge and expertise, coupled with a jargon-free approach, makes guiding clients through the complexities and technicalities of their tax affairs straight forward and efficient.

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

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