Posted by James Pearson on 26 Jan 2018
Disguised Remuneration Update – Loan Charge Enacted
Continuing HMRC’s long-running campaign against abusive tax avoidance, Finance (No. 2) Act 2017, which was enacted on 16 November 2017, contains legislation to create a one-off tax charge on loans from disguised remuneration (DR) schemes if those loans are not repaid by 5 April 2019.
HMRC see the use of loans from employer benefit schemes such as Employee Benefit Trusts (EBTs) or Employer-Financed Retirement Benefits Schemes (EFRBS) as the diversion of employee remuneration in order to avoid income tax and NICs. HMRC’s latest attack will treat most existing loans made by these schemes to their members as employment income if the loans are not repaid by 5 April 2019.
When EFRBS and EBTs were introduced, no tax charge arose on these loans (as long as interest was charged) on the basis that the loans would need to be repaid and therefore did not represent remuneration. This argument was upheld in the Tribunal decisions in respect of the Rangers tax case.
HMRC’s opinion was that many of these loans would never be repaid, so should be taxed as remuneration at the point that the loans were made to employees. Consequently, in late 2010 the “Disguised Remuneration” legislation brought new loans made by EBTs and EFRBS within the charge to tax.
This change did not affect existing loans, but HMRC has now enacted legislation that will tax EBT and EFRBS loans created after 5 April 1999 as employment income where they have not been repaid by 5 April 2019. This is complex legislation, with various contingencies and exemptions – if you have loans from an EBT or EFRBS and you think that this charge will apply to you, we would recommend obtaining specialist tax advice to confirm the position.
Separately, the Rangers case was finally concluded in favour of HMRC when the Supreme Court recently denied permission to appeal the High Court decision in favour of HMRC, strengthening HMRC’s position that loans from EFRBS & EBTs represented taxable remuneration when they were paid.
How this may affect you
We understand that HMRC have contacted taxpayers who have such loans in respect of the impending April 2019 tax charge, and have raised the spectre of penalties and accelerated payments; however, the legislation will only create a charge to tax in the 2018/19 tax year. Unless HMRC are separately attacking such schemes (e.g. under the Rangers case ruling), rather than waiting for the 5 April 2019 tax charge to arise, we believe that penalties should not apply, and no payment will be due until after 5 April 2019. Thus, HMRC appear to be muddying the waters for taxpayers who are already caught in a difficult position.
How can we help you?
Tax Innovations has broad experience of assisting taxpayers who find their EBTs and EFRBS under attack by HMRC. If you have loans from an EBT or an EFRBS, or if you have been contacted by HMRC in respect of such loans, then Tax Innovations can clarify any potential tax liability under the proposed legislation, as well as setting out your options for dealing with the matter and assisting with any communication with HMRC that may be required.
If you would like any advice regarding your loan from a disguised remuneration scheme, or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or email@example.com