Loan charge tax avoidance

‘Loan charge tax avoidance doomed to fail’ - HMRC

In spite of numerous warnings from HMRC, some companies still persist in trying to avoid tax for themselves and for employees, via a process called ‘disguised remuneration loans’. HMRC have issued yet another warning that these schemes simply won’t work.

Companies shouldn’t try to dodge the disguised remuneration loan charge

First of all, what exactly are disguised remuneration loan schemes?

These are arrangements, whereby, instead of paying an employee ordinary income, a company arranges loans – loans which will never be paid back. The sole purpose of such schemes is to avoid paying both Income Tax and National Insurance contributions. To stamp out these schemes, HMRC has recently introduced a charge on these loans. These charges are simply a tax charged against the outstanding value of the loan – a tax that you will have to pay.

Loans are ‘legitimately paid off’

The most recent warning from HMRC specifically cautions against schemes, marketed from an offshore location such as Cyprus, Malta or Isle of Man. The ‘promoters’ of such schemes claim to avoid the 5 April 2019 loan charge legislation. They assert that, by entering the scheme, your loan will be legitimately paid off. The promoters also sometimes claim, entirely wrongly, that you don’t have to disclose these schemes under the disclosure of tax avoidance schemes regime (DOTAS).

These promoters often come across as convincing, supported by professionally-produced marketing materials, including a website.

There will always be financial consequences

HMRC has issued a stark warning to taxpayers – that you should be wary of any arrangement suggesting that a disguised remuneration loan can be ‘paid off’ or ‘repaid’ with no real economic consequence – other than the promoter’s fees.

This is simply false.

HMRC insists that the new legislation fully tackles any attempts to dodge the rules, as it disregards non-monetary repayments. Consequently, for the outstanding loan balance, you will be subject to the charge.

The guidance warns that, if you sign up to these schemes, you’ll almost certainly have to pay administration and promoters’ fees, on top of the loan. These fees will be non-recoverable, so the result will be that, whichever way you look at the situation, you’ll lose out.

Advice please

I’ve been using disguised remuneration loans, instead of conventional pay. What should I do?

Our advice is as follows –

Withdraw from the scheme and settle your tax affairs. HMRC has published detailed guidance on how to do this. But register for this process now – before April 5th 2019.
An HMRC spokesperson said, ‘Although the loan settlement opportunity closed at the end of September, it is still possible to contact HMRC to register a possible loan charge and then to discuss a settlement agreement. They need to do this before the new tax year on 5 April and as long as they have registered by that time, it will be reviewed, even if it is not resolved with HMRC before the beginning of the tax year’.

Struggling to pay back taxes? HMRC will listen

The introduction of the loan charge has attracted considerable controversy. It seems that many people are going to really struggle to pay what they owe HMRC in back-taxes.

HMRC director general of customer strategy and tax design, Ruth Stainier, said, ‘Individuals who currently have an income of less than £50,000 and are no longer engaging in tax avoidance can agree a payment plan of up to five years without the need to give HMRC any information about their income and assets.

‘We have recently extended this to seven years for individuals who earn less than £30,000. People who consider they need more than five or seven years to pay what they owe, or who earn more than £30,000 or £50,000, should still come forward and talk to us about payment terms.

‘There are no defined minimum or maximum time periods for payment arrangements. We are committed to engaging with individual cases appropriately and sympathetically.’

Retrospective action

In spite of the flexibility shown by HMRC, it is still receiving criticism for imposing the charge retrospectively and denying repayment arrangements to those who missed last September’s loan settlement opportunity deadline.

HMRC responds that it’s simply collecting unpaid tax.

An HMRC spokesperson said: ‘The charge on DR [disguised remuneration] loans is not retrospective. It is a new charge, arising at a future date, on DR loan balances outstanding at that date. It does not change the tax position of any previous year, the tax treatment of any historic transaction, or the outcome of any open compliance checks.’
This claim is disputed by many who see the measure as highly retrospective.

ACCA head of taxation is Chas Roy-Chowdhury. He states, ‘This is the only instance where HMRC can go back more than seven years, effectively moving the statutory deadline, which only happens when it is a case of tax evasion.

‘The loan charge has been badly handled by HMRC. Of course, some people took out these loans up to 20 years ago and did not pay income tax or national insurance, and some may have had no intention of paying back the loans, but there are still people who are going to go bankrupt. There could be up to 50,000 people affected.

‘People had the opportunity to settle by the end of September [2018] but many did not because they thought it might be better to wait.

‘HMRC has made no effort to look at possible repayment terms. Some of these outstanding loans are for hundreds of thousands of pounds and HMRC needs to give these people the opportunity to speak to them, arrange repayment scheme, it could be structured in the same way as a mortgage payment over a long repayment period, maybe over years. HMRC simply cannot do anything about this and just contact people on 1 April telling them they owe thousands.’

Three alleged suicides

The Loan Charge Action Group (LCAG) is a lobby group of contractors. It has called on the prime minister to step in personally, delay the loan charge and suspend all settlements. LCAG claims to know of three suicides, resulting from the loan charge.

The group states that the loan charge breaks normal legal convention because it allows HMRC to impose a retrospective 20-year assessment on arrangements that were deemed legal at the time.

‘Thousands to go bankrupt’

LCAG declares, ‘The amounts involved are life-changing with most unable to pay, while also being deprived of their statutory rights to appeal, thousands are expected to go bankrupt with many expected to have to sell their homes.’

HMRC’s Stanier responds, saying that fears of homelessness or worse are unfounded. ‘HMRC does not want to make anyone bankrupt. Bankruptcy is only ever reached as an absolute last resort, and very few cases ever reach that stage.’

Stanier further claims that HMRC research indicated that the majority (75%) of the yield from the loan charge measure is expected to come from employers rather than individuals. HMRC has agreed settlements on disguised remuneration schemes with employers and individuals worth over £1bn.

So far, around 85% of tax secured has come from employers and less than 15% from individuals. There are an estimated 50,000 scheme users affected by the loan charge, representing about 0.1% of the UK taxpaying population.

Ask the experts

Have you taken part in disguised remuneration loans? Are you worried about what you should be doing? Get in touch and talk to us. We’ll help in any way we can.

Also, if you feel tempted, in spite of HMRC warnings to get involved in a scheme, talk to us first. As tax specialists, we know the law and we know how to save you from paying more tax than you should – legitimately.

We’re here to help.

Disclaimer

This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.

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