HMRC has announced a new and final settlement opportunity for employers, employees and contractors who have used disguised remuneration schemes in the past. This will give them a chance to settle their tax liability now before a new loan charge is introduced.
Those who would like to take advantage of this opportunity have to register their interest with HMRC by 31 May 2018 and make a full disclosure by 30 September 2018. Meeting these deadlines will give those involved the time they need to complete the settlement before the new loan charge becomes effective on 5 April 2019.
What is a disguised remuneration scheme?
Typically, disguised remuneration schemes involve an employer paying a contribution to a third-party, usually an employee benefit trust, rather than paying an employee directly. The trust then pays the employee in the form of interest-free loans with terms that mean they will never be repaid in the recipient’s lifetime, thereby avoiding the income tax and NICs that would otherwise arise from the payments.
Who does this settlement opportunity apply to?
The taxpayers affected include small businesses employing relatively few staff, employed and self-employed contractors and highly paid individuals who have used the scheme to avoid large amounts of tax. Although the new settlement opportunity will be available to all these parties, the terms of the scheme will vary slightly for each.
This settlement opportunity applies to a wide range of disguised remuneration schemes and not just those paid through employee benefit trusts. That includes DR filtered employer-funded retirement benefits trusts and those involving contractor loan schemes.
What back taxes need to be paid?
That depends on the specific facts of each case, but it could include: primary and secondary Class 1 NICs, income tax and inheritance tax.
Why might you choose to settle with HMRC?
By voluntarily contacting HMRC to settle your tax affairs for the use of historic disguised remuneration schemes, you have the chance to agree with HMRC what you owe and arrange a payment plan to pay your tax liability over time if you need to do so. Payment arrangements will be negotiated on an individual basis based on the level of income and assets.
The other potential benefits include:
- Avoiding the new loan charge that has been introduced;
- Paying a lower rate of tax on your disguised remuneration loans – if you don’t settle then the loan charge will be applied to all the loans which will be taxed in one year;
- Protection from the costs and stress of litigation.
How do you settle with HMRC?
The process of settling your tax affairs following the use of a disguised remuneration scheme is thankfully a relatively simple one. The first step is to register your interest with HMRC by 31 May 2018. To do that, if you’re not already speaking to someone at HMRC about your tax affairs, you can register your interest by emailing:
- firstname.lastname@example.org for contractor loan schemes;
- email@example.com for all other schemes.
You will then receive a settlement pack from HMRC which must be completed and returned by 30 September 2018. This will explain what happens next and what information you need to provide.
For contractors and employees, that includes:
- Your unique taxpayer reference;
- Your National Insurance number;
- The amount of contributions or contractor loans paid through the scheme for each tax year;
- The name of your employer.
Employers must send the following information:
- The company name and reference number;
- The PAYE reference number;
- The amounts and dates when funds were paid into the scheme;
- The details of corporation tax relief claimed on the contributions made to the scheme;
Employers, employees and contractors must also tell HMRC:
- The date any trust or sub-trust was set up;
- The total contribution that was paid into it;
- The details of any other assets held in that trust other than cash or the loan agreements.
If it is found that the information provided is inaccurate then the case can be reopened and penalties can be charged.
Will penalties and interest be charged if you settle?
Penalties may be added to the additional tax and NICs due if it is found that reasonable care was not taken when filing past returns which led to inaccuracies. HMRC has also said interest will be payable on the tax liability arising from years where it has or can still make discovery assessments. It will not charge interest on payments of tax/NICs from other years.
What should you do next?
Employers, employees and contractors that have benefited from or implemented such a scheme should examine it with their advisers to assess the extent to which it constitutes a disguised remuneration scheme. Withdrawing from the scheme and settling with HMRC by the deadline could allow you to avoid the costs of legal action and minimise penalty charges and interest.
However, there may also be ways of managing the liability that will arise under the 2019 loan charge and a tax expert will be able to advise on this. There have been some schemes created as an attempt to avoid the loan charge but HMRC has made it clear that such schemes do not work and further costs will be the likely result.
Alternatively, it could be that the advice you received at the time the scheme was created was negligent, in which case, a professional negligence claim against the advisors could arise.