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This newsletter will outline the new law that has been brought in by the government and your best steps of actions to avoid the loan charge.
What is a Disguised Remuneration Scheme?
A DR scheme is a scheme used by employers, employees and self-employed claimed to avoid paying the standard rates of Income Tax and National Insurance Contribution that they would normally pay on remuneration. Normally, the larger proportion of the remuneration is made up of a loan from a third party with no intention for the loaned amount to be repaid.
In July 2017 Rangers Football Club was found guilty of using a disguised remuneration tax avoidance scheme. The Supreme Court stated ‘that employment income paid from an employer to a third party is still taxable as employment income’ (HMRC, 2017).
The Loan Charge
In the Budget 2016, the new Loan Charge was announced and will apply for any loans made through a disguised remuneration tax avoidance scheme on or after 6th April 1999 and still outstanding on 5th April 2019. The charge arises on 5th April 2019 and this date is important as it is the last date of the 2018-19 tax year.
How the Loan Charge will work?
Contractors will be required to pay Income Tax on the total of all outstanding loans as if this was all income received in the 2018-19 tax year.
Self-employed and people who have used partnership schemes will also be liable to pay Class 4 National Insurance Contribution as well as the Income Tax mentioned above.
Any loan received in 2013-2014 and onwards will also include late payment interest.
Depending on the individual’s personal circumstance other tax liabilities may also apply, for example penalties and Inheritance Tax.
A Final Settlement Opportunity
HMRC are advising anyone who has been part of a DR scheme and still have outstanding loans to settle these prior to 5th April 2019 to avoid the Loan Charge. The tax due would almost certainly be lower as the loans will be treated income in the individual tax years that they were paid. In addition, the tax would be based on the net amount received.
There is more flexibility for payment terms to be extended through a contractual agreement before the loan charge comes into place. Additionally, payment arrangements are available if you struggle to pay the settlement amount. If you choose not to settle; the terms may no longer be available and you may face extra costs. Finally, settling will provide you with a peace of mind and more certainty.
If the loans made under a DR scheme were treated as a taxable benefit and this benefit was included in the personal P11D some Income Tax would have been paid. However, this is a relatively small amount compared to the Income tax due on the loan itself, but some tax has been paid nonetheless. Therefore, the overall amount due will be reduced by this amount.
There is a four-year window for this. As a result, only the years from 2013-14 onwards are open to amend the tax return in this way.
Additionally, if any Accelerated Payment Notices (advanced payments) relating to the DR schemes have been paid, the full amount is netted against the overall Income Tax due for the schemes and tax years against which they were issued.
How to Make Sure you Settle in time?
You have to register with HMRC before or on 31st May 2018 and then all of the requested information must be sent to HMRC by 30th September 2018.
To summaries, if you have any outstanding loans from a DR Scheme or you believe that you may have been part of a DR Scheme we strongly recommend for you to take action now.
If you are unsure if this applies to you or if you would like assistance with settling please do not hesitate to contact us. If you would like to arrange an initial consultation that is free and without obligation to discuss your circumstances, please email us at firstname.lastname@example.org.