01 April 2019
This article was featured in the April 2019 issue of the magazine.
Diana Bruce, MCIPPdip, CIPP senior policy liaison officer, discloses the actions some employers and workers must urgently take
Disguised remuneration tax avoidance schemes claim to avoid the need to pay income tax and National Insurance contributions (NICs). They normally involve a loan or other payment from a third-party which is unlikely ever to be repaid. These schemes have been used by employers and individuals, and also contractors (referred to as contractor loans).
Most employment agencies and umbrella companies operate within the tax rules, but there are some, however, that promote arrangements which claim to be a ‘legitimate’ or a ‘tax efficient’ way for a worker to keep more of their income by reducing their tax liability. These arrangements leave the worker at risk because individuals are ultimately responsible for their own tax affairs and for paying the correct amount of tax and NICs. These types of arrangements are never HM Revenue & Customs (HMRC) approved and are likely to result in paying additional tax, interest and penalties.
The arrangements may vary, but as an example this is how they might operate:
a small payment is received which has tax and NICs deducted
at the same time (or shortly after) a larger payment is received without tax and NICs deducted
the larger payment may arrive from a different account than the first payment, possibly from overseas, although not necessarily
the payslip may show the larger payment separately and refer to it as something other than ‘pay’. No tax or NICs have been deducted.
The 2019 loan charge
The 2019 loan charge, which was introduced by Finance (No. 2) Act 2017, is a tax charge on employment related taxable loans made by third parties on or after 6 April 1999 brought within Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
The loan charge was introduced to tackle disguised remuneration loan arrangements and will apply to all outstanding loans on 5 April 2019. Anyone who has received such loans instead of standard income and who has not taken action by then to either settle their tax affairs with HMRC or repay their loans, will face the loan charge. For the purposes of the loan charge, a loan includes any form of credit and a payment that is purported to be made by way of a loan.
Those who do not settle their disguised remuneration scheme with HMRC before the loan charge arises, will need to take steps to report any outstanding loans as employment income of the employees or directors to which they relate.
These amounts must be treated as employment income of each individual arising on 5 April 2019. The pay as you earn (PAYE) income tax and NICs due on these amounts must be paid by 22 April 2019 if paying electronically or by 19 April 2019 if paying by post.
Employees and former employees have a legal duty to provide their employer with details of their outstanding loan amounts at 5 April 2019. The required information must be provided to enable the employer to report the correct amount of any outstanding loans and operate PAYE on those amounts. If the information is not received by HMRC by 5 April 2019, then the loan charge will apply. HMRC has written directly to over 40,000 users, identified through its compliance work, IT records and tax return data.
An employer’s payroll software will need to support reporting of the disguised remuneration loan charge but if it doesn’t then HMRC’s Basic PAYE Tools has been updated for the 2018–19 tax year to enable this reporting.
Contractors, or employees settling separately to their employer, must tell HMRC:
their unique taxpayer reference
their National Insurance number
the amount of contractor loans or contributions made in each tax year
whether they want to claim a benefit in kind offset, and if so how much and for which years
the name of their employer.
Employers must tell HMRC:
their company name and company reference number
their PAYE reference number
the amounts and dates of funds paid into the scheme
details of any corporation tax relief they claimed on the contributions to the scheme
whether they want to claim a benefit in kind offset and if so the relevant employees’ details, how much and for which years.
For contractors, employees and employers, they must also tell HMRC the following if known:
the date any trust, sub-trust or other entity was created
the amount of the contribution paid into it
assets held in that trust, other than cash or the loan agreements.
The correct amounts must be reported. If it is later believed by HMRC that incorrect amounts were reported due to careless or deliberate behaviour a further penalty of up to £3,000 may be applied.
Accelerated payment notices
Where an employer has paid an accelerated payment notice (APN) – effectively a payment on account – in respect of a scheme that will be affected by the loan charge, the employer can make an application to have this amount offset against the loan charge. HMRC will need to be informed if an application is made in respect of each APN by providing the following information:
the name and scheme reference number of the avoidance scheme in respect of which an APN was paid
the amount that has been paid in respect of that APN
the date(s) on which payment(s) were made in respect of the APN, and
the amount of the loan relating to that APN outstanding on 5 April 2019.
Time to pay arrangements
Where the taxpayer will have difficulty paying what they owe, time to pay arrangements can be made. The loan charge will see all outstanding loan amounts (possibly going back as far as 1999) crystallise as at 5 April 2019 in order to subject the amount to tax and NICs. Higher tax payments may impact entitlement to tax-free childcare and the high income child benefit charge.
Payment can be spread over a number of years; however, the amount due can be paid over a period of up to seven years without the need to provide any detailed financial information, where:
the expected current year taxable income is less than £30,000 which for employees is the expected gross earnings and for the self-employed this is the expected net profit
the individual is no longer engaged in tax avoidance
the disguised remuneration tax affairs are settled or the information needed to do so is provided before 5 April 2019.
For payment arrangements of up to five years, the expected current year taxable income is less than £50,000.
There are no defined minimum or maximum time periods for payment arrangements but HMRC will need to ask for more information. Even where someone thinks they have no realistic way of paying what they owe, they should still call HMRC as soon as possible. They will discuss options and work with the individual to resolve their tax matters in the best way.
Contractor loan scheme users can call 03000 534 226 and for all other disguised remuneration scheme users can speak to their usual HMRC contact or email [email protected].
Alternative schemes that suggest there is a way to avoid this charge do exist; however, in Spotlight 36 (https://bit.ly/2iRnElT) HMRC have made clear their view of such schemes – they will not succeed.