Coming Soon…The Disguised Remuneration Loan Charge

Sarah Bradford examines the new charge on outstanding loans from disguised remuneration schemes. 

 

There have been many attempts by employers to ‘beat the system’ and pay employees other than in the form of wages and salary in a bid to save tax and National Insurance contributions (NICs).  

 

One such example is the use of a third party, such as an employee benefit trust, to make a loan in perpetuity to the employee, rather than making a salary or bonus payment. Under such an arrangement, the employee benefits from the use of the money. However, while the loan was outstanding, the employee is taxed under the benefit-in-kind provisions; the taxable benefit being calculated by reference to the official rate of interest. The benefit-in-kind tax charge is significantly less than the tax and NICs that would have been payable had the loan balance been paid as a salary or bonus payment instead. The loan only becomes taxable in full if it is written off, but the loans were made on terms that made it very unlikely that they would ever be repaid.  

 

Unsurprisingly, HMRC were not going to let this continue. Specific legislation was introduced from 6 April 2011 (with transitional provisions applying to arrangements entered into after 9 December 2010) to bring ‘disguised remuneration’ within the charge to tax (ITEPA 2003, Pt 7A). A package of further measures to tackle disguised remuneration schemes was announced at the time of the 2016 Budget. The measures included the introduction of a disguised remuneration loan charge to deal with historic loans, the legislation for which was introduced by the Finance (No 2) Act 2017.  

 

The loan charge will apply to loans received through a disguised remuneration scheme which were made after 5 April 1999 and which are still outstanding on 5 April 2019. The loan balance will crystallise at that date, and will be subject to PAYE and NICs. Broadly, the amount charged to tax and NICs is the initial amount lent, plus any subsequent loans, less any amounts repaid. The loan charge will be operated by the employer. The parties to any arrangement within the scope of the loan charge are obliged to provide information to the employer, so that the employer has the necessary information on which to calculate the charge. 

 

There are a number of exemptions from the charge, and in certain circumstances the charge can be postponed. HMRC also offer a settlement opportunity. 

 

Certain loans are outside the scope of the loan charge. Exclusions apply to: 

In each case, the exclusion is dependent on the loan meeting certain conditions. 

 

The loan charge can be postponed if either of the following applies: 

An application for postponement can only be made by the person who is liable for the charge. Applications for postponement must be made by 31 December 2018. 

 

After an application for postponement has been made, HMRC will confirm in writing whether it has been approved. The approval letter will state how long the postponement will last, what to do if the loan is repaid and how to pay the charge when the postponement ends. 

 

To apply for postponement on the basis that the loan is a qualifying fixed term loan, approval is needed from HMRC. A loan is a qualifying loan if it: 

An excluded loan is one that was replaced, either directly or indirectly, after it was granted by another loan or one where the terms have been altered to meet the maximum ten-year term requirement. 

 

For HMRC to approve the loan, they must be satisfied that: 

Repayments are qualifying repayments if they have been made at intervals of no more than 53 weeks. Evidence that this is the case must be provided to HMRC. A loan is a ‘commercial loan’ if it is made by a lending business or on terms that are comparable to those on which loans are made to members of the public. 

 

HMRC recommend that applications for approval and postponement are made at the same time. The necessary forms are available on the Gov.uk website at: www.gov.uk/government/publications/disguised-remuneration-apply-to-postpone-your-2019-loan-charge-dr100. 

 

The loan charge can also be postponed if an accelerated payment has already been made for the same loan. To be eligible, the amount of the loan which is outstanding on 5 April 2019 must be equal to or less than the value of the accelerated payment.  

 

Applications for postponement made on this basis should be supported by a copy of the loan statement from the lender showing the balance of the loan at the date of the application. In the event that it is not possible to obtain such a statement, HMRC will consider alternative evidence, such as a statement from the lender indicating the initial balance and the current balance, a letter or loan agreement showing the initial balance, together with a note of the current balance and bank statements showing the repayments, or a ledger printout showing the loans advanced and the amounts outstanding.  

 

HMRC are also offering a disguised remuneration settlement opportunity, which may be preferable to paying the loan charge. Anyone wishing the take advantage of the settlement opportunity should register their interest with HMRC as soon as possible and provide all of the required information by 30 September 2018. Details of the settlement opportunity, and the action that should be taken to participate, can be found on the Gov.uk website: www.gov.uk/guidance/disguised-remuneration-settling-your-tax-affairs. 

 

Taking advantage of the settlement opportunity enables the taxpayer to agree with HMRC what they owe and, if required, to arrange a payment plan. It will also mean that the taxpayer does not have to pay the disguised remuneration loan charge on 5 April 2019.  

 

The loan charge will crystallise all outstanding loans on 5 April 2019 and the tax will be payable in one hit. Under the settlement opportunity, the charge may be spread over several tax years, potentially reducing the amounts taxed at the higher rates.  

 

If the loan is repaid by 5 April 2019, the loan charge will not apply. 

 

Where a loan from a disguised remuneration arrangement which was made after 5 April 1999 remains outstanding, there are a number of options available; however, the clock is ticking. The taxpayer can: 

If the taxpayer does not take any of the first three options, the loan charge will apply on 5 April 2019 to all outstanding loans. This may not be the best outcome. 

 

Review all outstanding loans made under disguised remuneration schemes as soon as possible and determine the best course of action. The window of opportunity to escape the loan charge is limited.