A settlement opportunity for loan schemes

A settlement opportunity for loan schemes

 

HMRC has published new guidance for taxpayers on how to settle their tax liabilities from disguised remuneration loan schemes.

 

A loan charge on such schemes will apply from April 2019, introduced by Finance (No 2) Act 2017. There is more detail about the rules and the legislation at the end of this article. The guidance is part of HMRC’s campaign to encourage those involved in such schemes to come forward to agree what tax is payable and a payment plan before the loan charge bites.

 

There are two sets of guidance, both published by HMRC on 7 November, namely:

 

 

Taxpayers who wish to settle, or their advisers, on their behalf, should register an interest with HMRC by 31 May 2018. They must then provide the detailed information (set out in the guidance) by 30 September 2018. The liability should be agreed and paid (or a payment arrangement put in place) by 5 April 2019.

 

In HMRC’s words, 

“Settling now will give you certainty about your disguised remuneration scheme and may also mean you: 

  • don’t have to pay the new loan charge that is being introduced
  • pay a lower rate of tax on your disguised remuneration loans - the loan charge will add all your loans together and tax them in one year
  • settle on the terms in this guide - if a scheme moves to litigation, these terms may no longer be available
  • don’t face extra costs if the scheme moves to litigation”.

The guidance explains: 

  • how and by when those wanting to settle who are not already speaking to someone at HMRC should register their interest – there are different contact details for contractor loan schemes and for all other disguised remuneration schemes,
  • the information that must be sent to HMRC and by when,
  • the settlement terms, which differ depending on whether classified by HMRC as a contractor, employer or employee,
  • what taxes, NIC, and, depending on circumstances, interest and/or penalties, will be payable, and
  • arrangements for those who have problems paying what they owe.

 

We welcome the fact that in designing the settlement terms government has taken into account our concerns (cited in our recent Finance Bill briefing to MPs, ICAEW REP 108/17) that the loan charge could lead to much higher tax charges than if the loans had been treated as income when originally paid. This is because the loan charge bunches all outstanding loans into one year, and this unexpected tax charge could bankrupt some individual users, which would be counterproductive.

 

In addition to this guidance, HMRC in its Spotlights series highlights – with a strong recommendation to avoid – schemes still being promoted which purport to, for example, enable disguised remuneration loans to be treated as not being loans or as having been repaid.

 

Background to disguised remuneration schemes and the loan charge

Disguised remuneration schemes often involve employees and contractors being paid in loans through structures such as offshore employee benefit trusts (EBTs).

 

In Finance Act 2011, the government legislated sections 554A et seq ITEPA 2003 as a new Part 7A: “Employment income provided through third parties” to clamp down on the use of these schemes.

 

Finance Act 2016 amended Part 7A by introducing a targeted anti-avoidance rule, removing a transitional relief on certain investment returns and making some other minor clarifications.

 

Finance Act 2017 added new charges and exclusions, effective from 6 April 2017, and comprehensive double taxation relief, generally effective from 9 December 2010.

 

Finance Bill 2017-19 currently being considered by Parliament (and soon to be enacted as Finance (No.2) Act 2017) introduces a new charge (the ‘loan charge’ referred to above) on disguised remuneration loans that were made after 5 April 1999 and remain outstanding on 5 April 2019. As noted above, we recently briefed MPs on this clause in ICAEW REP 108/17.

 

Draft clauses published for comment on 13 September (with a view to inclusion in Finance (No.2) Bill 2017-19 which is likely to come before Parliament in December and which will be enacted next Spring as Finance Act 2018) introduce information requirements for employees within the aforementioned loan charge and a new close company gateway. We responded to HMRC on these proposals in ICAEW REP 113/18

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