Disguised remuneration draft legislation is both too wide and too narrow

Draft Finance Bill legislation to extend the disguised remuneration (DR) legislation by adding a close company gateway (CGC) seems more akin to a general anti-avoidance rule targeted at extraction of value from close companies, says ICAEW Tax Faculty. It is so broad that it is likely to catch many benign arrangements, including those entered into by entrepreneurial non-domiciled individuals whom the government is trying to protect and who may have severed links with the UK and their employment many years before.


Conversely, the employee loan charge information requirements in the same draft Finance Bill legislation appear too limited to force third parties to provide users of employee loan schemes with all the information necessary to enable those individuals to comply with their new information requirement obligations.


ICAEW Tax Faculty expressed these views in our response (ICAEW REP 113/17) to the invitation to comment on draft Finance Bill legislation: Employment income provided through third parties published on 13 September 2017.


The draft legislation seeks to augment the current disguised remuneration legislation found in Part 7A ITEPA 2003. It proposes changes in two specific areas:


  1. it proposes additional circumstances, to be known as a close company gateway (CCG), to come into effect from April 2018, which is intended to complement the existing gateway, so that if a taxpayer and a set of arrangements meet the conditions of either the existing gateway or the proposed CCG, an amount will be taxed as employment income; and
  2. it introduces an information requirement on employees who are subject to the DR loan charge being legislated in s 34 and Sch 11, Finance Bill 2017-19 (soon to be Finance (No.2) Act 2017).


Close company gateway

HMRC’s position is that some taxpayers try to argue that the existing gateway is not engaged as there is no employment connection. However, the new CCG is akin to a general anti-avoidance rule, which suggests that it is aimed at extraction of value from close companies rather than just disguised remuneration. Despite two major changes having been made, we believe that the CCG will undermine the government’s concurrent efforts to introduce a protected trusts regime for a wide class of non-domiciled individuals, being the more entrepreneurial non-doms that the Government has made clear that it wishes to remain in the UK.


We recommend that the CCG is not pursued in its present form and that other better-targeted means, for example finessing other existing legislation, are pursued.


Information provisions

Our main concern here is that some employees who were users of DR schemes may be unable to obtain from third parties the information necessary to comply with their information requirement obligations (for example, trustees may say that they cannot provide information as it would breach trust) and be liable to penalties despite having done their best to comply.


We suggest that the legislation provides that all parties to DR loan arrangements including trustees are obliged to provide all the data required within a set time limit, and that when considering penalties for non-compliance HMRC should adopt a sympathetic view towards employees who have used their best endeavours to obtain the information.