Everyone is familiar with the old adage about death and taxes. Yet over the past couple of decades, there’s been an undeniable surge in the number of companies and businesses operating in the UK that are seemingly going out of their way to try and slash their respective tax bills.
In more than a few cases, those cost-cutting measures have turned out to be illegal. So starting in April 2019, HMRC will be cracking the whip on one of the UK’s most commonly used tax avoidance schemes. Any and all corporate entities or individuals caught taking part in a so-called disguised remuneration scheme will be placed on-track for serious legal repercussions and crippling financial penalties.
As a result, financial directors must do everything in their power to ensure that they fully understand how HMRC perceives tax avoidance, how disguised remuneration works, the penalties of non-payment, and what to do if their organisation has been involved in such a scheme in the past.
What is disguised remuneration?
Simply put, disguised remuneration is a blanket term used to describe earned income that has been received via some sort of non-taxable scheme in order to disguise the payment of income to a company or an individual. These schemes typically come in the form of a dummy loan, although disguised remuneration schemes do come in multiple forms.
The most popular in recent years have been so-called employer-financed retirement benefit schemes and employee benefit trusts – the latter of which are entities that are theoretically designed to hold assets and offer long-term incentives to employees with which to encourage and foster their corporate participation and engagement.
It’s worth pointing out that not all employee benefit trusts are disguised remuneration schemes, and on the one hand, some of them are indeed genuine and the organisations responsible pay all taxes owed to HMRC on these funds. On the other hand, the UK Government is finding that many these trusts don’t actually exist, and are simply offshore shells designed to redistribute funds in the form of dummy loans.
According to HMRC, the average disguised remuneration scheme user earns twice as much as they should on an annual basis – and government research indicates 70% of scheme users have been using disguised remuneration for 2 years or more.
Until relatively recently, these schemes were fairly difficult for HMRC to identify and penalise. Yet over the last 7 years, lawmakers have been working closely with tax regulators to hand HMRC a host of new powers, enabling it to punish those found participating in, enabling or promoting disguised remuneration schemes. Above all else, the new power that should concern financial directors the most is HMRC’s incoming ability to impose financial penalties of up to £1m or all of the fees earned if a person or company is found guilty of attempting to enable tax avoidance through disguised remuneration.
The countdown to April 2019
There won’t be a single financial director left in the UK who is not anxiously counting down the days until the UK breaks from the EU on 29 March 2019. But those in charge of an organisation’s financial strategy and fiscal wellbeing would do well to circle the following Friday in red, too – because on 5 April 2019, the UK Government’s new charge on outstanding disguised remuneration loans will come into force. If not appropriately addressed, that legislation could hit some UK companies even harder than a no-deal Brexit.
This new penalty, which is colloquially being referred to as the ‘2019 loan charge’ was announced as part of George Osborne’s 2016 budget, and the UK Government initially predicted it would raise around £3.2bn for the Exchequer. That being said, it wasn’t actually introduced in law until the Finance Act (No 2) 2017 was passed.
This charge will apply a blanket tax charge of up to 50% of any alleged loan identified as a disguised remuneration scheme, and it will retrospectively apply to all disguised remuneration loans that have been made since 6 April 1999. It’s worth noting, however, that HMRC has said it will not issue the charge against outstanding loans if the individual contacts HMRC and agrees to a settlement prior to April 2019.
Who should be worried about the 2019 loan charge?
According to the UK Government, up to 50,000 individuals and entities in the UK will be hit by the charge. This amounts to just one fifth of a percent of all Income Tax payers in the UK, although HMRC estimates that 65% of those affected by the charge work in business services, while 10% work in construction.
HMRC has already written out to all those already identified as having participated in a disguised remuneration scheme – and so companies or individuals that have yet to receive a letter from the government about this charge should be able to breathe a sigh of relief. But that doesn’t necessarily mean an organisation won’t be hit by the loan charge at a later date.
Consequently, 20,000 individuals and employers have already contacted HMRC to register an interest in settling their bill before the 2019 charge comes into force, and 5000 have already agreed to pay the tax they owe. In addition, one lifeline HMRC has opted to extend to some scheme users is the ability to spread outstanding payments over the course of 5 years, but this olive branch will only be passed to individuals with an estimated taxable income of less than £50,000 for the current tax year.
Companies must act now to avoid paying later
Financial directors have a major role to play in order to ensure their organisations are able to avoid the 2019 loan charge, and that role inherently begins by conducting a thorough, internal sweep of company finances in order to identify any scheme that a related company, subsidiary or individual has engaged in since April 1999 that HMRC could possibly deem a disguised remuneration scheme. When in doubt, and even prior to such an audit, organisations may want to reach out to a relevant law firm, accountant or multi-disciplinary professional services firm to receive advice and guidance.
If participation in any sort of disguised remuneration loan scheme is identified, it must be shut down immediately – and FDs will need to contact HMRC as soon as possible to report the situation and settle their company’s tax affairs by agreeing to a figure and arranging a payment plan if and when required.
In exchange for approaching HMRC, organisations or individuals found to owe outstanding tax as a result of such a scheme will be exempt from the loan charge that comes into effect on 5 April 2019. They’ll also be eligible to pay a lower rate of tax on any disguised remuneration loan payments by adding all loans together and taxing them all in one year, rather than multiple years. Above all else, settlement now will mitigate inevitable litigation costs later.
Although HMRC had issued an initial call to affected companies and individuals to register their interest to settle by 31 May 2018, alongside an information submission deadline of 30 September 2018, the government has said it will continue to accept registrations of interest to settle until the 2019 loan charge is applied.
With regard to the information required, employers or contractors will be expected to share the date in which any trust, sub-trust or other entity applying to the charge was created, the amount of the contribution that was paid into it, and the assets held in that trust that are not cash or any loan agreements. If the amounts provided to HMRC are found to be incorrect, a case against the organisation or individual in question will subsequently be reopened, and the offender may be eligible to pay the full financial penalty.
For professionals working on a contract basis, there could be some silver lining in that the overall amount owed to HMRC because of participation in a disguised remuneration scheme can be reduced by any Income Tax paid in which a benefit in kind was declared on the basis of receiving a beneficial loan. Employers and larger companies may be able to benefit from this slight reduction as well, but it will only apply for tax years that can still be amended or in which there is still time to claim for over-payment relief.
Time to avoid embarrassment and financial ruin
At the end of the day, and despite new powers and stronger penalties to combat disguised remuneration schemes, it does appear that HMRC has expressed a willingness to work alongside corporate entities and individuals that have previously or are currently engaged in a disguised remuneration scheme. In some cases, the government is even offering a degree of leniency to those willing to come forward and settle prior to April 2019.
However, financial directors cannot afford to bet on any degree of leniency from HMRC if they identify participation or engagement with a disguised remuneration loan scheme at a future date. In order to avoid the crippling new financial repercussions that go hand-in-hand with non-payment, it’s worth pursuing professional advice from an experienced law firm, accountant or multidisciplinary professional services provider now to avoid embarrassment or financial ruin later.