Tax avoidance schemes currently in the spotlight

16 February 2017

 

Two disguised remuneration schemes have been highlighted by HMRC with guidance on what to do if using one of the schemes.

Together with guidance on what tax avoidance is HMRC’s ‘Spotlights’ aim to warn individuals and businesses against using tax avoidance schemes. ‘Spotlights’ informs us about schemes that HMRC believes are being used to avoid paying tax due.

 

Disguised remuneration: schemes claiming to avoid the new loan charge (Spotlight 36)

Disguised remuneration avoidance schemes are used by employers and individuals to avoid Income Tax and National Insurance contributions (NICs). Although there are various types, they normally result in a loan from a third party on such terms that mean it’s unlikely to ever be repaid.

At Budget 2016 the government announced a number of changes to tackle existing avoidance schemes and prevent their future use. The changes will include a new ‘loan charge’ on disguised remuneration loans which are outstanding on 5 April 2019. To prevent attempts to exploit the new loan charge, a targeted anti-avoidance rule will ensure further avoidance schemes don’t work.

Schemes claiming to avoid the loan charge

Some promoters claim to have come up with schemes that enable users to get out of the loan arrangements and avoid the loan charge, in return for a fee.  These schemes don’t work. The only way you can avoid the new loan charge is by making a repayment of the loan balance or settling the tax liability with HMRC in advance. Any repayments connected to a new tax avoidance arrangement will be ignored and the loan charge will still apply.

Why you shouldn’t use these schemes

Using such a scheme and paying further fees to a promoter won’t prevent the loan charge from applying to disguised remuneration loans outstanding on 5 April 2019. HMRC will investigate any attempts to avoid the new loan charge.

For transactions taking place after 16 July 2013, HMRC will consider whether the General Anti-Abuse Rule (GAAR) may apply. After 14 September 2016, transactions where the GAAR applies will be subject to a 60% GAAR penalty.

What to do if you’re using one of these schemes

Users of these schemes can pay back the outstanding loan in full by 5 April 2019 or settle with HMRC to avoid accruing interest.  If you’re already speaking to someone at HMRC about your use of a disguised remuneration scheme, you should contact them. If you’re not already speaking to someone at HMRC, you should email: exitsteam.counteravoidance@hmrc.gsi.gov.uk.

 

Disguised remuneration: tax avoidance using annuities (Spotlight 35)

HMRC is aware of a new disguised remuneration tax avoidance scheme that attempts to avoid Income Tax and NICs. It involves using annuities as an alternative method of paying people for their services, in order to avoid paying tax and NICs on their income.

An annuity is a form of investment where a person pays a lump sum, usually to a pension company, in return for a guaranteed income - either for life or a fixed number of years. Private annuities, such as those used in this scheme, are very rare.

How the scheme works

This scheme is mainly aimed at contractors and involves the scheme user being paid in two parts. The first part is a salary, so small that there’s little or no Income Tax or NICs liability. The second part is claimed to be non-taxable, as it’s a capital payment for a deferred annuity.

The scheme is highly contrived and involves the user agreeing to pay the promoter an income under the annuity from a date of their choosing.

Why you shouldn’t use it

The view of HM Revenue and Customs (HMRC) is that this and other similar schemes don’t work.

Schemes involving annuities are within the scope of the proposed new loan charge, which will apply to all outstanding disguised remuneration loans on 5 April 2019.

What will happen if you use the scheme

HMRC will challenge all users of this scheme and investigate their tax affairs.

Unless the capital sum for a deferred annuity is paid back in full by 5 April 2019, or you settle with HMRC, the new loan charge will apply to the outstanding sum.

For transactions taking place after 16 July 2013, HMRC will consider whether the General Anti-Abuse Rule (GAAR) may apply. After 14 September 2016, transactions where the GAAR applies will be subject to a 60% GAAR penalty.

What to do if you’re using the scheme

Users of this type of avoidance scheme should settle with HMRC as soon as possible. If you don’t you might have to pay additional tax and interest on the outstanding disguised remuneration loans. You could also receive a penalty.

If you haven’t filed your return yet, you should do so on the basis that the payment for the deferred annuity is taxable income.

If you’re already speaking to someone at HMRC about your use of a disguised remuneration scheme, you should contact them. If you’re not already speaking to someone at HMRC, you should email: exitsteam.counteravoidance@hmrc.gsi.gov.uk.

 

Further information

More details on these changes can be found in the consultation on tackling disguised remuneration.

Find out more about how to identify tax avoidance schemes.