Proposals for existing disguised remuneration loans disproportionate

These need to be improved 

The proposals to introduce a new tax charge on disguised remuneration loans and quasi-loans which were made after 5 April 1999 and remain outstanding on 5 April 2019 are penal and disproportionate. 

We have published our comments in ICAEW REP 18/17 submitted in response to HMRC seeking comments on draft legislation (clause 32 and Schedule 10) proposed as part of its campaign against disguised remuneration avoidance schemes. 

As noted in our earlier response to the summer consultation ICAEW REP 150/16, we consider that the measure:

  • contravenes generally accepted notions of fairness and breaks the constitutional convention against retrospective legislation, imposing tax charges in cases where taxpayers already had legal certainty that none were due,
  • is at variance with HMRC’s arguments in many court cases (successful to date) that monies paid via employee benefit trusts (EBTs) and employer funded retirement benefit schemes (EFRBS) were actually earnings that should have been subject to PAYE and NIC,
  • are aggressively retroactive against taxpayers who have not done anything that would under current rules leave themselves open to a 20 year assessing window which currently requires HMRC to demonstrate that there has been a deliberate inaccuracy in a return, especially as HMRC has been aware of loans to employees since at least 1999 and has failed to open inquiries or raise assessments before the expiry of statutory deadlines, 
  • affects transactions which were entered into up to 17 years ago where HMRC has taken no timeous action despite knowledge of the alleged avoidance and so is likely to lay the proposed legislation open to challenges under the Human Rights Act,
  • contrasts with the favourable terms given to so-called tax evaders under the former Liechtenstein Disclosure Facility even though the taxpayers disclosed the loans at the time, and
  • is unnecessary given that many of the outstanding cases are covered by existing legislation, in particular the s554A gateway which could be applied instead of HMRC proposing new legislation.

Coupled with likely problems surrounding availability of records, the provision should not include loans made earlier than when the government announced its intention to take action.

Our other detailed recommendationst:

  • it is disproportionate to aggregate all the loans to ascertain the tax chargeable on 5 April 2019 – there should be top slicing to alleviate the unfairness; and
  • the legislation needs to clarify who is liable if the primary payer, ie the employer, cannot pay or has ceased to exist or is offshore.

As to the close company gateway, we are concerned that, amongst the presumed unintended consequences of the new provisions, certain commercial transactions and foreign resident trusts settled by non-domiciled individuals appear to fall within the scope of the proposed changes, in which case the legislation needs to confirm that both of these situations are not caught.