2017 settlement opportunity
HMRC has announced a final settlement opportunity in relation to Disguised Remuneration (DR) Schemes, and has provided information on identifying a DR scheme. This is a chance for employees/employers and contractors to settle their tax liability on their historic DR schemes before the new loan charge is introduced on 6 April 2019.
Any individual or company who used DR schemes should consider all options now before this opportunity passes once and for all.
HMRC past action:
HMRC has been clamping down on historic users of DR arrangements for a number of years. DR schemes are whether payments, such as loans, have been made to employees or contractors via third parties (usually offshore trusts) without deduction of PAYE and National Insurance Contributions (NICs) at source. The understanding behind the loan will be that it will most likely never be repaid.
Schemes of this nature have been attacked by HMRC over the years with measures such as Accelerated Payment Notices, Follower Notices and the Serial Tax Avoiders Regime as well as several court cases providing legal authority. In 2016 and 2017 additional measures were brought in with the purpose of eradicating DR arrangements. These included the new tax charge for 2019.
2018 tax charge:
The 2019 tax charge on outstanding loans from DR arrangements will be introduced on 5 April 2019. The charge applies to all loans (or quasi loans) made since 6 April 1999 which remain outstanding on the date the charge is introduced. The charge will tax outstanding loans as if they were remuneration paid on 5 April 2019. It does not eradicate past years’ tax and NIC liabilities.
The new settlement opportunity – key points:
- If you are in a DR scheme and you wish to settle your tax affairs, you must register your interest with HMRC by 31 May 2018.
- All required information must then be sent to HMRC by 30 September 2018.
- There are different settlement terms depending on whether you are a contractor, employer or employee. This is the first time that distinct settlement terms for contractors have been set out by HMRC.
- The settlement opportunity applies to a range of DR schemes, no matter what type of third party is used. It will include Employee Benefit Trusts, DR filtered employer-funded retirement benefit trusts, and a range of contractor loan schemes.
- It makes no difference whether employers settle in respect of their employees or the employees settle individually. Whichever way, the settlement process and sum will be the same.
- Income tax and NIC (employers and employees) will be calculated and payable using the bands and rates in the years the scheme was contributed to, or allocations were made. All years where HMRC has a PAYE determination or a protective NICs claim in place (or if there is still time for either of these) must be paid. Income tax is payable based on tax rates and bands for the years the loan was taken.
- Conversely, the 2019 loan charge will tax all loans in one year, likely to be 2019/20. As a result, most taxpayers who used DR schemes would pay more tax at that point, as the composite taxable sum will incur tax at a higher rate, making the current HMRC settlement opportunity more attractive.
- Tax relief may be offered where the employee declared a benefit in kind on the basis of receiving a beneficial loan, but only as long as the relevant tax year remains open. The employer will be refunded any Class 1A NICs in relation to this.
- For loans or other payments made from funds paid into the DR scheme in years which are not protected, a voluntary payment must be made to HMRC (voluntary restitution) to prevent future DR charges (including the loan charge) arising. This payment will be of the Income Tax and NICs on the contribution to, or allocation within, the scheme in those years.
- Late payment interest will be payable for protected years. Higher rate tax must be paid under the settlement agreement. There is no late payment interest on voluntary restitution.
- Penalties will have to be paid where HMRC find that reasonable care was not taken in filing returns.
- Inheritance tax may be payable depending on the nature of the DR scheme and the amounts put through the trust.
Companies that have implemented such arrangements should be looking closely at these arrangements with their advisers, to consider to what extent they may be challenged as DR schemes. HMRC strongly advises users to withdraw such schemes and settle their tax affairs, to avoid the costs of legal action and to minimise incurring interest and penalty charges at a later date.
Our specialist legal tax team has helped employers and individuals participate in previous settlement opportunities and is advising on the current settlement opportunity. If you have queries or require guidance, please do not hesitate to get in touch.