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The 2016 Budget included a clause on future measures to tackle the current and historic use ‘disguised remuneration’ schemes. These are generally schemes that involve individuals being paid in loans through structures such as an offshore Employee Benefit Trust (EBT) or Contractor Loans. In both instances, whilst the loans are theoretically repayable, the Loan Agreement is drawn up in a such a way to ensure that, in reality, these loans are never repaid.
The clause ended “…this will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5th April 2019.”
In the first step on this journey, individuals that have been remunerated through an EBT and who have not settled with HMRC by 30th November 2016, will no longer qualify for relief on investment returns.
Commonly under an EBT, an employer paid in funds to an offshore Trust to benefit an employee. At the moment, HMRC has been looking to settle based on the amount paid into the Trust by the employer whilst there is a relief against any gains made on these monies whilst within the Trust. From 30th November 2016, tax will be due on the full amount.
Contractor Loan schemes are still actively marketed on the basis that it will reduce a tax bill for a contractor. Ironically, running a contract through a Limited Company in a tax efficient and compliant manner can usually yield the same return.
Under these schemes, rather than being paid directly from the company that the employee is working for, the remuneration is via loans from an associated trust, partnership or company.
The employee is taxed on the Benefit in Kind of receiving an interest-free loan. For the 2016-17 tax year, this would be 3.00% of the loan and this continues over the length of the employment.
If you are working under a Contractor Loan scheme, it is mandatory for the promoter to declare the scheme to HMRC. HMRC will issue the scheme with a reference number that the promoter must pass on to you for inclusion in your personal tax return.
However, any suggestion that the issuing of this reference number infers that the HMRC has approved the scheme is mendacious. The reality is that this is identifying you as a user of the scheme ahead of future investigation.
Even before the impact of the upcoming changes outlined later in this newsletter, HMRC is aggressively pursuing the users of these schemes.
For instance, under an investigation, HMRC could review your mortgage or other credit applications for evidence of a disparity between the income declared on these and that declared on your tax return. If loan receipts have been included as income for mortgage purposes, HMRC would have compelling evidence of a wilful complicity in tax evasion.
At CooperFaure, we have successfully negotiated settlements with HMRC for our clients working under a raft of these schemes. If you are concerned about your situation, please contact us at tax@cooperfaure.co.uk for a free and informal consultation.
Before looking at the impact of the proposed future measures outlined in the Technical Note published by HMRC, it is important to bear in mind the Brexit effect. A consultation on the proposals was due over the summer but, as yet, HMRC are unable to confirm when this will actually start.
In essence, the government is planning to introduce legislation to put beyond doubt that all loans and other income from a disguised remuneration scheme will be taxed as earnings if these have not been fully taxed or repaid by 5th April 2019.
Thereby, this would remove the necessity for HMRC to prove that a particular scheme was a method of tax evasion.
Within the Technical Note, there are some alarming proposals, the front and centre of which is that the notion of there being a time limit on how far back the HMRC can go to claim and collect tax on disguised remuneration is removed.
Legislation was originally introduced in Finance Act 2011 aimed at putting beyond doubt that EBT schemes in particular were not effective. This legislation came into effect from the date it was announced on 9th December 2010.
Now, HMRC are pointing to their Spotlight 5 published on 5th August 2010 to validate their view is that these schemes were never tax compliant.
Individuals that operated under an EBT scheme before 2011 have a powerful argument that tax was not payable under the law at the time when the loan was advanced. Participators in various schemes are seeking a tax tribunal hearing to make this case.
Even if the tax tribunal ruling goes in their favour, this will be overridden by the proposed new legislation. Moreover, it effectively allows HMRC carte blanche to pursue loans made all the way back to the first EBT schemes in the late 1980s.
The usual tenet is that the responsibility for the payment of PAYE and National Insurance lies with the employer that was party to the avoidance scheme.
Disturbingly, the proposals include an amendment to PAYE regulations to allow the Income Tax and National Insurance to be collected from the employee “where it cannot reasonably be collected from the employer.”
Given that many of the promoters are no longer around for the HMRC to pursue, the is putting the individual fore square in their sights.
Whilst it may seem grossly unjust to target individuals who have effectively been mis-sold schemes on the basis that they were tax compliant, public opinion is with the government especially in the light of the lurid cases of public figures and celebrities using such schemes to avoid tax.
What is beyond doubt is that the legislation scheduled for inclusion in the Finance Bill 2017 will be a game changer.
At CooperFaure, we will be actively participating in the HMRC consultation process. If you have any concerns from working under an EBT or Contractor Loan scheme either currently or historically, we would be pleased to have a candid and realistic discussion on this with you.
We urge anyone with an outstanding EBT enquiry to consider the implications of the direction of travel.
If you would like to arrange an initial consultation on your circumstances or to receive our free newsletters on this and other tax matters, please email tax@cooperfaure.co.uk.
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