HMRC has been involved in a long-running battle against arrangements that it believed were little more than devices to circumvent the operation of PAYE and NIC by employers. Typically, this involved the directors of owner-managed businesses and contractors operating via Personal Service Companies who were rewarded in part via Employee Benefit Trusts (“EBT’s), Employer Funder Retirement Benefits Schemes (“EFRB’s) or Contractor Loan Schemes. These arrangements were heavily marketed by many professional advisers during the early 2000’s, up to around 2014 and were supported by legal opinion that they were a tax-compliant reward mechanism. Typically, such arrangements involved funds being paid gross by the employer into some kind of Offshore Trust mechanism, which was then later made available to directors via a loan, thereby avoiding the need to account for PAYE and NIC on the basis that the payments were not “salary”.
Needless to say, HMRC disagreed with this view, and have challenged all such arrangements they have become aware of via investigation and litigation. The HMRC view is that once it is decided to set aside funds to reward directors or employees then it matters not what mechanism is used for payment, PAYE and NIC are applicable. The Tax Tribunal and the Courts have supported this view and HMRC have been largely successful their challenges. To prevent such arrangements in future there has been a raft of legislation – referred to as “Disguised Remuneration” legislation – to ensure that PAYE and NIC is applied going forward.
A problem for HMRC had been that to investigate and correct users of Disguised Remuneration arrangements they only have a limited period to open investigations, and once they have missed the boat there is little they can do to challenge a historic arrangement, although we are aware that one controversial tactic used by HMRC is to allege that arrangements involved serious fraud, which gives HMRC a 20-year window within which to open an investigation. This has caused uproar as these arrangements were typically supported by legal opinion and were implemented under professional advice. Even if HMRC disagreed with the legal view, this hardly justifies allegations of fraud. It should be up to HMRC to do its job properly and open timeous investigations, rather than use trickery and invent fraud where it does not insist.
However, to circumvent this, HMRC and the Government have effectively enacted retrospective legislation that seeks to tax all unpaid loans in these circumstances made since 6 April 1999 and still outstanding at 6 April 2019. The charge on outstanding disguised remuneration loans, known as the 2019 “Loan Charge”, was announced at Budget 2016 and was introduced in the Finance Act (No 2) 2017.
The charge will apply to all loans made since 6 April 1999 if they are still outstanding on 5 April 2019, and effectively treats the loan outstanding as if it were salary. The charge will not arise on outstanding loans if the individual has agreed a settlement with HMRC under existing law before 5 April 2019. Obviously, if the loan has been repaid or legally extinguished the Loan Charge legislation does not apply.
I have an Outstanding Loan – What are the Consequences for me?
There is still time to engage with HMRC to discuss settlement options, and we can assist with this if possible. Otherwise, HMRC would normally look to collect the tax arising from the employer in the first place as it is the responsibility of the employer/company to pay the 2019 Loan Charge under the PAYE legislation. The employer is then expected to pass this cost on to the individual.
If the employer is no longer in existence, then the tax liability can be passed on to the individual beneficiary of the arrangement. Furthermore, HMRC has indicated that it will pursue any claims to company insolvency very vigorously and will look to transfer liability to director/employee where appropriate.
Failing all else, HMRC would expect a beneficiary to report the details on their 2019 tax return and pay any resultant liability.
HMRC have already flagged up that they will be policing the Loan Charge vigorously, and they have already gone on record as rubbishing claims that there are arrangements that will circumvent the Loan Charge. We expect to see a number of challenges in this area, and it will be interesting to see how HMRC’s enforcement goes here, as HMRC’s robust claims have not yet been tested before the Courts.
HMRC have been writing to all known participants in Disguised Remuneration arrangements to warn them of their obligations, and to ramp up the pressure on participants.
Isn’t Retrospective Legislation Immoral?
In our opinion – in one word – yes!
Imagine driving down a road one day at 50mph in your car, in a 50mph speed limit area, only to be prosecuted for it on the basis that the speed limit was retrospectively lowered after the day you had driven legally at 50mph on that road to change the limit to 30mph. There would be uproar!
There has been uproar on the Loan Charge too – led primarily by a pressure group known as the “Loan Charge Action Group” but supported by a number of politicians. HMRC has also been rebuked by a recent House of Lords Economic Affairs Committee report over its handling of the Loan Charge, and Theresa May was challenged at Prime Ministers Question Time recently over the issue by Sir Edmund Davey MP and as a result a cross-party delegation is due to meet with the Chancellor of the Exchequer to discuss the issue. However, as with Brexit it is cutting things very fine!!
Our view is that whilst the now prevailing view, as expressed by the Courts and Tax Tribunals, is that the pre-existing EBT’s/EFRB’s etc were ineffective, if HMRC has not acted in a timeous manner to open enquiries the dust should be left to settle on those old cases, particularly as subsequent legislation has ruled out similar arrangements going forward. As individuals and businesses must adhere to legislation, so should HMRC rather than relying on moving the goalposts unfairly to paper over the cracks in their performance. Similarly, it is a blatant abuse of process by HMRC to allege fraud in cases where professional advice and legal opinion was followed.
So, what are my Options?
There are still a number of options: –
- If HMRC are already aware of your arrangement and have competently-opened enquiries, then settlement options should be explored
- If settlement options are being explored with HMRC but affordability is an issue, HMRC have indicated that there are options regarding Time to Pay arrangements
- If all else fails, it is worth examining whether palatable insolvency action is possible
- Dependent upon circumstances, the loan could be extinguished, but care needs to be taken
- Despite HMRC’s expressed views that arrangements purporting to avoid the Loan Charge are ineffective, it is not possible at this stage to adopt a “one-size fits all” approach as HMRC are seemingly doing. There is an element of “they would say that anyway”. There is no harm in keeping an open mind and being alive to possible solutions. The only cautionary note we would sound here is to seek a professional second opinion upon any arrangements before they are contemplated
- Above all – keep a close eye on the discussions with the Chancellor to see if there is any softening of approach
If you are affected by the Loan Charge, or if your clients are, please feel free to contact us for advice.
It may be that you or your client is considering whether to implement one of the arrangements aimed at circumventing the loan charge. Despite HMRC’s assertions about the effectiveness of such arrangements a balanced view needs to be taken of the likely effectiveness of such arrangements, and we would be happy to provide an impartial second opinion before any arrangements are implemented, as any weaknesses could prove extremely costly.