You may have seen a bit in the financial news lately on the loan charge tax to be levied on payments received by employees through disguised remuneration schemes used to avoid income tax and National Insurance contributions.
Those involved will have to pay the loan charge for any such loans made since 6 April 1999 that are still outstanding on 5 April 2019 or agree a settlement with HM Revenue & Customs. Repayment plans are available.
HMRC has said it is aware of 50,000 workers – including contractors, agency staff, supply teachers and nurses – who have used disguised remuneration schemes to cut their tax bills.
However, it said in November that fewer than half of them had set up formal repayment plans ahead of the 5 April deadline, leaving them liable to a significant tax charge.
The government announced the loan charge at the 2016 Budget. It is expected to recoup £3.2bn in lost tax.
Typically, disguised remuneration schemes involve an employer paying an employee indirectly through a third party, often an offshore trust, instead of a salary, which would attract income tax and NICs. Employees are loaned money by the trust on terms that mean the loan is unlikely to ever be repaid. Under the new rules, the outstanding loans will be considered employment income for the 2018/19 tax year, resulting in income tax for the employee, and NICs for the employee and the employer.
With the scope for repayment stretching back two decades, the liability could be huge.
Anyone affected by the loan charge may have been able to postpone the date on which it needs to be paid to HMRC. However, to do this, they will have had to have applied for postponement by 31 December 2018.
In its sights
It is worth noting that legislation to combat tax avoidance through disguised remuneration has been in place since 2011, with HMRC using a number of measures to encourage settlement of any outstanding arrangements. Although often considered as tax planning for the wealthy, given the range of schemes put in place, these arrangements do not just affect higher-paid workers but also agency staff, such as teachers and those in the NHS.
HMRC maintains it has always considered these schemes, such as employee benefit trusts, to be tax avoidance, although people affected have expressed anger at what they view as a retrospective change to the law.
The most recent development saw the Lords’ economic affairs committee urge a government rethink on the loan charge.
On 8 January, an amendment was tabled to the Finance Bill by Liberal Democrat MP Sir Edward Davey, requiring the Treasury to reassess the likely effects of the policy before it comes into force, and to present its report to parliament by 30 March.
This amendment will not necessarily lead to any changes to the law relating to the loan charge and its application from 5 April.
Vital next steps
It is vital that those involved who have not done so already contact HMRC as soon as possible to start settling their affairs.
The sooner HMRC receives the required information, the more chance there is of reaching a settlement before the loan charge comes into effect.
That said, in a further twist, the Financial Times reports HMRC has admitted that around 60 per cent of people who have sent the information needed to work out how much tax is owed from their participation in disguised remuneration schemes have not yet received calculations from the authority.
An HMRC representative confirms: “Where agreement has not been reached with a customer by 5 April 2019, HMRC will consider carefully whether or not to extend settlement under the existing terms.
“Each case will be considered on its own merits, and factors include whether or not the customer has met all HMRC’s deadlines and responded promptly to any queries and correspondence from us.
“If a customer has not been able to settle by 5 April solely because of error or delay on HMRC’s part, we will ensure that the customer is not disadvantaged.”
Tony Wickenden is joint managing director of Technical Connection (a St James’s Place Wealth Management group company). You can find him Tweeting @tecconn