Disguised remuneration schemes have been one of the priorities for HM Revenue and Customs (HMRC) in recent years. These schemes are a form of tax avoidance, seeking to avoid Income Tax and National Insurance contributions (NICs) by paying users their income as a loan. As there was no intention to repay these loans, they are deemed to be normal income and therefore taxable.
The Finance Act (No 2) 2017 introduced new legislation intending to tax those loans, which date back to 6 April 1999 and remained unpaid as of 5 April 2019. HMRC hoped to raise a staggering £3.2 billion through this new legislation. However, it is currently understood that only 2,000 people have opted to settle with the Revenue for circa £1 billion to avoid further loan charge penalties. It is yet to be clarified if the loan charge will be cancelled following the ongoing review commissioned by the Chancellor.
What is “disguised remuneration”?
Disguised remuneration schemes seek to avoid Income Tax and NICs by paying users their income in the form of loans that are never repaid. However, as the loans were never intended to be repaid, they do not differ to normal income and are therefore taxable.
You may have been part of one of these schemes if you worked for someone as a paid: director, employee or contracted worker, and agreed to receive your salary in the form of a loan. Importantly, the understanding would be that this loan would not need to be repaid at any time. These loans are described as disguised remuneration loans.
The most common forms of disguised remuneration in recent years have been Employee Benefit Trusts (EBTs) and unregulated pension schemes known as Employer Financed Retirement Benefit Schemes, both of which have now been identified by HMRC as disguised remuneration schemes.
What is the loan charge?
This is an anti-tax avoidance measure which was introduced by the Finance Act 2016 to recoup losses to the Exchequer from the aforementioned disguised remuneration schemes.
The average amount of tax avoided per person was in the region of £20,000 per annum, with a large proportion of those using a disguised remuneration scheme doing so for more than 1 year. The sums involved clearly leaves at least 50,000 people facing a significant tax bill which could force many into bankruptcy.
Who is affected?
It is estimated that less than 0.2% of individual Income Tax payers in the UK used these schemes, with 65% of that group coming from the business services sector. This includes a variety of professions from management consultants to IT consultants.
Would I know if I have been part of a disguised remuneration scheme?
If you were caught by the aforementioned legislation, then HMRC would have been in contact and initially offered the opportunity to settle, with advantageous terms by 5 April 2019. However, due to the complexity of the claims, this was further extended to 31 August 2019, with many cases still unresolved. If you fall into this group, whereby your claim has been registered but you have not settled, our expert legal team may be able to help.
However, if you have not been contacted by HMRC at this point, it may be worth waiting for the Chancellors review, which is meant to be published mid-November.
The Chancellor, Sajid Javid recently commissioned a review into loan charges to determine whether the current policy is appropriate to deal with disguised remuneration schemes, which will be published in mid-November. HMRC have advised that those who have settled or in the process of doing so, will not be directly impacted by this and should proceed as before.
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Need Expert Tax Disclosure Lawyers Advice?
If you have entered into a disguised remuneration scheme (or any other tax avoidance scheme), it is important you seek legal advice as soon as possible.
Whether you are an employer, employee or contractor, our expert tax solicitors and barristers can assist you in managing HMRC’s investigation and entering into negotiations by providing comprehensive legal advice and robust responses to the investigators. Our tailored team which also comprises of specialist forensic accountants can calculate what you owe and make representations on your behalf to HMRC.
Our Tax Disputes professionals are available to give information and advice in negotiating penalties and loan charge settlement with HMRC. To contact one of our specialist Tax Lawyers please click here or call 02071830529.