Disguised remuneration: how businesses and employees are being affected by HMRC’s new loan charge
HMRC’s approach going forward
Many employees and employers face difficulty funding the new loan charge liabilities, which may result in staff welfare issues for HR professionals to consider. HMRC accept payment plans for employees with income below £50,000 per annum and for businesses having trouble funding liabilities, but do these go far enough?
Lobbying groups have been formed to express concerns that the new loan charge is retrospective legislation, unfair and an undue burden on taxpayers. On 16 July 2019, the government announced loan charge ‘clarifications’ and a new ‘professional standards committee’ to advise HMRC on implementation of statutory powers.
In a letter to MPs, the government accepts there are some genuine concerns, specifically: “That the policy may breach established norms of taxation by reopening tax years which have already been signed off and agreed with HMRC; and that there is a lack of flexibility for those in financial difficulty who want to settle.
“There have also been concerns that HMRC have been slow or inaccurate in providing calculations to people wishing to settle, and that the tone of letters could be seen as aggressive. HMRC acknowledge that the service provided has sometimes fallen short.”
Going forward, HMRC will:
- ensure that the same income will not be taxed twice under the loan charge
- take a more collaborative approach to loan charge communications (bodies including the Chartered Institute of Taxation and Institute of Chartered Accountants in England and Wales will advise)
- not apply the loan charge to a tax year where an enquiry was closed on the basis of fully disclosed information
- exercise additional flexibility for individuals settling under the published terms who are in genuine hardship. Where a person has no realistic prospect of paying tax due under the loan charge, HMRC will stop pursuit and leave any unpaid debt to be collected later, only if their circumstances improve, in line with current practice.
The last two points represent a change in HMRC’s current approach. This will be a relief for individuals otherwise facing insolvency, but what will be the impact on businesses?
What is DR?
DR typically involved replacing an employee’s taxable earnings with an employer funded loan from a third party.
Schemes varied from an employee receiving large loans from an Employee Benefit Trust, rather than a bonus or dividend, to tranches of employees being transferred from their employer to an intermediary, which then supplied their labour, but paid workers in the form of loans. Some cases involved groups such as engineers or nurses who were not made fully aware of the nature of the arrangements, but now face charges they can ill afford.
Generally, loans were left outstanding until the employee’s death when they were written off. Minimal tax charges arose: during employment, a small annual employment tax charge arose if interest paid was less than the official rate. No tax arose on the loan when made or written off, and the employer could claim a corporate tax deduction and saved employer’s National Insurance contributions (NICs). The schemes appeared attractive and several boutiques specialised in their promotion and implementation.
The history behind the DR legislation
Consequently, legislation introduced from 6 April 2011 blocked these plans and other forms of ‘reward or recognition’ provided by a third party.
These rules are complex and difficult to navigate, but most advisors recognised they effectively stopped new DR planning. However, some schemes persisted despite aggressive design. Other DR plans were frozen, or HMRC settlement arrangements entered into in order to unravel them.
The new loan charge
Perceived continued abuse resulted in a new charge on DR loans taken out since April 1999. These loans were treated as earnings taxable on 5 April 2019, unless they had been repaid or settled with HMRC. See the detailed settlement terms.
The fact the loan charge catches both pre and post-April 2011 arrangements has resulted in concern from taxpayers, believing that they had acted within the law but now face huge unexpected tax bills.
Indeed, DR settlements have raised more than £1 billion; 85% from employers, and HMRC resources dedicated to recovering this charge are significant.
Employer reporting and accounting obligations
Employer deadlines to report DR loans and pay any PAYE/NIC arising have now passed. Businesses that have not yet met their obligations should ensure that they have identified any loans subject to the charge and either settled with HMRC or accounted for the PAYE/NIC due.
We are expecting more information in the coming weeks. A key question remains of whether completed settlements can be reopened and settlement payments recovered.
The author is Caroline Harwood, Partner and Head of Share Plans and Employment Tax at national audit, tax, advisory and risk firm, Crowe.
This article is provided by national audit, tax, advisory and risk firm, Crowe.